Administrative decentralization and credit resource reallocation: Evidence from China's “Enlarging Authority and Strengthening Counties” reform

Abstract With the rapid development of county-level economy promoted by continuous administrative decentralization reform in China, the shortage of county-level credit resources has become an increasingly serious problem. Based on the quasi-experiment of China's “Enlarging Authority and Strengthening Counties” (EASC) reform, this paper investigates the reallocation effect of administrative decentralization on county-level credit resources for the first time. We take a big panel data set of China's 1981 counties (county-level cities) during the period of 1997–2012 as research sample. Combining the difference-in-differences (DID) model with the propensity score matching (PSM) method to correct the sample self-selection bias, we estimate the effect of the EASC reform on the financial agglomeration of both deposits and loans. The results show that the administrative decentralization represented by the EASC reform exerts different reallocation effects on county-level deposits and loans. The EASC reform enhances loan agglomeration but restrains deposit agglomeration, intensifying the contradiction between the supply and demand of credit resources. The reallocation effect of the EASC reform on loans shows an inverted U-shaped trend over time, indicating that the reform effect gradually weakens. The significantly positive effect of the EASC reform on deposit financial agglomeration lasts only two years, followed by a continuous negative effect.