September 2019
This paper expands a standard growth model to analyze the roles played by the government system in the Chinese economy, with a particular focus to include the agency problem between the central and local governments. The economic tournament among local governors creates career incentives for them to develop local economies. The powerful incentives also lead to short-termist behaviors, which explain a series of challenges that confront the Chinese economy, such as overleverage through shadow banking and unreliable economic statistics.