Political Accountability and Local Government Debt: Evidence from China

Li, Runheng and Tang, Yao and Weng, Xi and Zhou, Li-An (2026): Political Accountability and Local Government Debt: Evidence from China.

Abstract

This study investigates how the interaction of political accountability and local officials' career incentives shapes the market for Municipal Corporate Bonds (MCBs) in China, taking the 2017 local government debt personal responsibility rule as a quasi-natural experiment. We develop a stylized incomplete-information bargaining model to analyze how the rule reshapes the bargaining equilibrium by rendering officials' observable characteristics credible signals of bailout incentives. Using a dataset of prefecture-level MCBs from 2008 to 2020, we empirically test the model's predictions and focus on separating officials' incentive effects from their inherent ability. Our core findings show that post-announcement of the rule, each additional year of a local party secretary's remaining time to retirement, a proxy for bailout incentives, reduces MCB spreads by approximately 2.5 basis points and increases issuance volume by about 2.0%. These effects are significantly amplified in fiscally stressed cities. Notably, under the 2017 rule, cities led by party secretaries with stronger bailout incentives can expand MCB issuance, which is contrary to the rule's original intent to rein in local borrowing.

• Item Type: MPRA Paper
• Language: English
• Keywords: Municipal Corporate Bonds, personal responsibility rule, official career incentives, local government debt
• Subjects: E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook > E62 - Fiscal Policy; G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing ; Trading Volume ; Bond Interest Rates; H - Public Economics > H7 - State and Local Government ; Intergovernmental Relations > H74 - State and Local Borrowing; P - Economic Systems > P2 - Socialist Systems and Transitional Economies > P26 - Political Economy ; Property Rights

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