Incentives and Strategic Behavoirs of Governments: Incentive Matters

The main theme of this book is government?s strategic behaviors. We show that different budget structures give governments incentives to behave differently. We first discuss theoretically the design of an optimal tax system, promoting the Leviathan government to maximize social welfare in order to maximize its own revenue. We apply the Buchanan-Brennan rule to examine the effects of a tax system on the efficiency of agricultural production in the context of Chinese local governments. Within the principal-agent framework, we illustrate how the problem is inherent in the agriculture tax system in China and propose our solution of special earmarking. Then we examine empirically how government behaviors vary with different budget structures. We argue that the environmental performance is affected by government policy, therefore relates inherently to the budget structure and government incentives. Our empirical evidence provides support that structures of revenue and expenditure do affect the government?s incentives to control pollution. So, to achieve better environmental performance, changes in the budget structure might be helpful.