Recently, the research titled Transfer Payment Policy and Risk Sharing under Regional Economic Fluctuations, conducted by Wang Xiaoxiao (corresponding author), a researcher at the Center for International Cooperation and Disciplinary Innovation of Income Distribution and Public Finance (111 Center), along with her research partner Zhao Xufeng (School of Public Finance and Taxation, Southwestern University of Finance and Economics), was officially published in Issue 8, 2025, of Economic Research Journal, a top journal.
Highlights
Transfer payments have become an important source of local government finance in recent years. According to the fiscal year-end data released by the Ministry of Finance, in 2019, transfer payments accounted for 42.4% of the general public budget revenue of local governments in China. By 2023, this figure had risen to 46.8%, and in 2024, the scale of central government transfer payments to provincial governments exceeded 10 trillion yuan. The main component of transfer payments is general transfer payments, which primarily aim to "promote the equalization of basic public services across regions."
At the same time, local economies in China have also faced the impact of domestic and international uncertainties. The sustainability of local finances and ensuring the "three guarantees" have become new requirements and challenges for local finances in recent years. As a form of fiscal fund distributed across regions, transfer payments are enormous in scale and crucial to local finances. In theory, they should play a role in sharing fiscal risks between regions. However, transfer payments have not been specifically designed for risk-sharing. For example, the "factor method" used in the distribution of general transfer payments lacks corresponding risk factors. The scale of stabilization adjustment funds set up by the central and local governments is much smaller than the amount of general transfer payments. Under the premise that economically developed regions also have lower economic risks, transfer payments allocated from developed regions to underdeveloped regions can serve the purpose of equalization and ensuring fiscal stability in underdeveloped regions. However, when developed regions also face higher risk exposure, a new risk-sharing mechanism needs to be considered.
Additionally, local economies are simultaneously influenced by economic fluctuations and region-specific productivity factors. These two factors are difficult for policymakers to identify and separate, which means the design of transfer payments must also consider the impact of information asymmetry. This paper constructs a multi-region transfer payment model under the scenario where both economic fluctuations and heterogeneous productivity exist. It explores the optimal design of general transfer payments that balances both equalization and risk-sharing.
This paper provides the design rules for optimal transfer payments when local economies simultaneously face volatility and productivity differences. It explains how the optimal transfer payment rules can balance inter-regional risk-sharing and local public expenditure incentives, ultimately promoting regional equalization and ensuring both central and local governments are fully incentivized. The model results clearly decompose the dual mechanisms through which optimal transfer payments address risk factors and regulate local expenditure incentives, and it presents a transfer payment formula based on local output and productivity differences. Using 2019 county-level fiscal data, this paper calculates the distribution of regional productivity and economic fluctuations, and simulates the optimal transfer payments. The numerical results show that the optimal transfer payments increase with the productivity dimension (i.e., the level of return on expenditure) and decrease with the output dimension (where output, controlling for productivity, reflects the size of the risk). This result reflects the basic idea of transfer payments, which share regional risks while also providing appropriate incentives for local productive expenditures. The numerical results show that the optimal transfer payments outperform the current transfer payment policies in reducing inter-regional disparities in basic public services and narrowing local output fluctuations.
About the Author
Wang Xiaoxiao is a lecturer at the School of Public Finance and Taxation, Zhongnan University of Economics and Law (ZUEL), and a researcher at the Center for International Cooperation and Disciplinary Innovation of Income Distribution and Public Finance. She holds a Ph.D. in Economics. She graduated in 2023 from the School of Economics of Peking University with a major in Fiscal Economics. Her research areas include optimal taxation theory, focusing on topics such as income distribution and the bounded rationality of taxpayers. Her research has been published in academic journals such as Economic Research Journal, Economic Perspectives, Journal of Financial Research, and Economic Science. She presided over the Youth Project of the National Natural Science Foundation of China, titled "Re-distribution Policy Optimization under the Dynamic Evolution of Income Risk: An Analysis Based on a Multi-information Friction Principal-Agent Model."