Optimal Local Government Debt in China

摘要: This paper develops a model for optimal local government debt with Chinese characteristics, which takes into account the roles of the central government and local governments in the macroeconomy. The central government is tasked with providing optimal public goods to the entire society. The central government needs to trade-off the utility of households and the utility of public goods provided by the government, assign different weights to them, and strive to maximize the welfare of the whole society. Local governments are responsible for providing optimal public goods to their jurisdictions, with their revenue sources including profits from local state-owned assets (including land use right transfer revenues), taxes, and the issuance of bonds. Using a calibration method, we determine the optimal debt and debt limits for the Shanghai municipal government and other local governments. The findings indicate that the model can effectively estimate the debt and debt limits of local governments.