Rural road stimulus and the role of matching mandates on economic recovery in China

This paper explores the implications for economic recovery of a rural road stimulus program in China that led to the sudden suspension of local matching mandates. The main results reveal that a temporary cost share exemption stimulates short-term income growth in treated villages. As an explanation, I find that a cost share exemption leads to larger increases on local investment mainly on allied road improvements and to a lesser extent support for rural enterprise development and agricultural services. The observed crowding-in effects are further linked to the reallocation of households out of agriculture and a rise in entrepreneurial activities by returning migrants. The findings imply that matching mandates impede the ability of fiscally constrained locales to mobilize sufficient resources to cover their share of project costs, contributing to inadequate road investment from upper-levels of government. Suspending matching mandate helps to relax local budget constraints, stimulating income and local multipliers that help to accelerate economic recovery.