Institutional Adaptation and Educational Equity: A Case Study of Fiscal Transfers in Guangdong Province

Background and Aim: In China, provincial-level fiscal transfers are intended to reduce educational disparities across counties, yet their effectiveness has been inconsistent. This study examines Guangdong Province as a case to explore how transfer payments influence educational equity, particularly in light of limitations in existing frameworks such as the “formula-neutral” theory in fiscal federalism, which assumes standardized transfers can balance efficiency and fairness, and the multilevel governance paradigm, which often overlooks provincial-local dynamics. To address these gaps, this research proposes a new institutional framework that incorporates local governance capacities and socio-cultural contexts. Materials and Methods: A mixed-methods approach was employed to investigate how fiscal transfers are implemented and interpreted at the county level. Quantitatively, the study used a difference-in-differences (DID) model on panel data from 2015–2022 to assess policy impacts. Qualitatively, policy document analysis and semi-structured interviews with local officials were conducted in 15 diverse counties. Special attention was given to ethnic minority regions, where local cultural practices influence the use of funds. Results: The analysis revealed significant regional variation in how transfers affect equity. In the Pearl River Delta (PRD), increased population mobility led to an 18% decline in resource equity due to outdated population-based funding formulas. In contrast, northern mountainous counties improved their education equity by 12%, as measured by the Gini coefficient, through localized cultural integration strategies. Governance practices also influenced outcomes: counties with strong administrative autonomy and participatory budgeting showed better alignment between funds and needs, while historical policy patterns constrained adaptation elsewhere. Technology-driven investments, though promising, widened the urban-rural teacher gap by 23%. The introduction of a dynamic allocation formula and digital governance tools improved institutional responsiveness by 22–37%. Conclusion: This study introduces the concept of the “dynamic equity gap” to explain how rigid allocation models fail under changing demographic and governance conditions. It proposes a new institutional framework based on “institutional fit,” emphasizing compatibility between fiscal tools, local conditions, and national equity goals. By advocating for flexible formulas, real-time data platforms, and regional cooperation mechanisms such as the county equity alliance, the study suggests a shift from static technical fixes to adaptive institutional reforms in education finance governance.