Performance Gaps and Organizational Change: Evidence from Budgetary Growth in Chinese Local Governments

Performance gaps, defined as the differences between expected and achieved organizational performance, generate informative feedback for organizations to make subsequent decisions.In this paper, we examine how social and historical performance gaps in the realm of economic development have different effects on the budgetary decisions of Chinese local governments.Using a panel dataset of 287 cities from 2010 to 2016, we find evidence that the performance gap in comparison with the historical expectation is positively related to total expenditure growth, while there is an asymmetric inverted U-shaped relationship between the performance gap based on peer comparison and public spending growth.Additional evidence suggests that performance gaps are also associated with the growth of public education spending in a similar way.Our study provides evidence of performance-based budgeting beyond the Western contexts and offers the base for a generalizable theory on how performance information in high-stake accountability systems shapes local governments' spending decisions.