Flattening governments, flattening growth: Equalization–efficiency trade-off in jurisdictional reform

Flattening government hierarchies not only reduces organizational layers but also restructures fiscal capacity, reshaping both local growth incentives and regional redistribution. This paper identifies a fundamental trade-off: while flattening promotes equalization across regions, it simultaneously undermines economic efficiency at the local level. We develop a multi-tier government model showing that reallocating fiscal authority upward enlarges common revenue pools, which enhance redistribution but dilute local governments’ incentives to foster growth. Empirically, we exploit China’s staggered Province-Managing-County (PMC) reform as a quasi-natural experiment and apply a stacked difference-in-differences strategy to county-level panel data from 2000 to 2007. We find that the PMC reform significantly reduced intra-provincial inequality—measured by Gini, Theil, and related indices—but concurrently lowered county GDP per capita. Reductions in physical investment and firm-level productivity, rather than shifts in labor input, drove the efficiency loss. Heterogeneity analysis reveals that provinces with stronger fiscal pooling (higher VAT-sharing ratios) and broader administrative spans experienced a more severe equalization–efficiency trade-off. Our findings extend fiscal federalism and organizational structure theories by showing how hierarchy flattening and fiscal pooling jointly shape the balance between redistribution and local economic performance.