Fiscal Origin of Property Rights (In)Security: Evidence from China’s Enforcement

• In Event: State Capacity and Taxation

Abstract

Why are some governments less predatory and more friendly to market development? While conventional wisdom emphasizes the role of legal and regulatory rules in nondemocratic contexts, it is the unconstrained governments that determine the degree of enforcement. This article offers a fiscal theory: Governments with fiscal pressures resort to predation through arbitrary legal and regulatory enforcement, thereby using fines as extra revenue resources. Impairing property rights security then hinders long-term business investments. Empirically, we focus on city-level governments in China and draw on the data of all disclosed enforcement records in China from 2015 to 2021 (N=17,630,000). For robust causal inference, we employ two identification strategies: First, we leverage the due government investment debt as an exogenous instrument for municipal fiscal pressure; Second, we use a difference-in-differences framework to estimate the fiscal impact of China's value-added tax reform on enforcement. Both analyses reveal consistent results that every 1% increase in fiscal pressure leads to an 8% increase in regulatory enforcement. This effect is especially noticeable in areas with minimal economic impact from enforcement, greater government discretion, and a preference for fines over other forms of punishment. We also provide suggestive evidence that fiscal-driven enforcement reduces the number of new businesses, especially in industries that are vulnerable to government regulation.

Authors

• Ziwen Zu

• Shengqiao Lin, Harvard University