Flattening of Government Hierarchies and Misuse of Public Funds: Evidence from Audit Programs in China

Journal of Economic Behavior and Organization

Shiyu Bo, Yiping Wu, Lingna Zhong

Abstract

Reducing the number of layers (or “flattening”) government hierarchies is a popular trend in developing countries, but the value of doing so is unclear. Using a hierarchy reform in China that started in 2003 as an exogenous shock, we investigate whether flattening government hierarchies results in local governments using fiscal funds poorly. We use a unique dataset from audit programs in China and find that the county-level amount of misuses of fiscal funds detected by auditors increases after the government hierarchy is flattened, because the monitoring of county leaders decreases and then they can more easily divert public funds from their statutory use. Furthermore, the misuse of funds leads to sizable losses in public welfare and trust and a stronger perception of corruption.

Keywords: Hierarchy: Flat organization: Delayer; Audit; Public funds

JEL classification: D73; H11; H77; H83; O10

Read more: https://doi.org/10.1016/j.jebo.2020.08.045