Political Attributes of Transfer Payments, Vertical Fiscal Imbalance, and High-Quality Regional Economic Development: Evidence from 215 Prefecture-Level Cities in China

Central governments use transfer payments to mitigate vertical and horizontal fiscal disparities, equalize public services and promote high-quality regional development. However, political and economic factors may undermine high-quality economic development, particularly in regions with pronounced local vertical fiscal imbalances. We develop a theoretical framework to examine the interplay between the scale of transfer payments, vertical fiscal imbalances, and high-quality economic development and explore the nonlinear impacts of transfer payments on regional economic advancement under varying transfer payment orientations and vertical fiscal imbalances. With data for 215 prefecture-level cities in China from 2007 to 2019, we find that: (1) Transfer payments negatively influence high-quality economic development, especially in scenarios involving earmarked transfer payments and tax rebates. Thus, the politically motivated nature of transfer payments may impede local governments’ autonomous developmental capabilities. (2) Vertical fiscal imbalances mediate the relationship between transfer payments and high-quality regional economic development. Increased transfer payments can intensify regional fiscal imbalances and stifle high-quality economic development. (3) Local fiscal imbalance significantly moderates the impact of transfer payments, with diminished effects of transfer payments on economic development observed in regions with greater fiscal imbalances. (4) Significant threshold effects are found in the influence of transfer payments on high-quality regional economic growth. Transfer payments enhance high-quality economic development up to a certain level of fiscal imbalance, beyond which their promotional effects become inhibitory. This study contributes to understanding dynamics between fiscal policies and economic outcomes and the design of effective transfer payment mechanisms.