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| Implicit Government Subsidy, Local Government Bond Pricing and Banks’ Local Bond Allocation |
| ZHENG Changjun，CHEN Shiying，QIAN Ningyu |
| 1.Huazhong University of Science and Technology, Wuhan, China；2.Zhejiang Ocean University, Zhoushan, Zhejiang, China |
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Abstract On the basis of multi-unit auction theory, this study explores the collusion and games between local governments and banks around local government bonds. By constructing a theoretical model, the study finds that: the implicit government subsidy significantly reduces the issuance interest rate of local government bonds. However, local governments reintroduce profits outside tendering through local resources reconfiguration. Local governments subsidize the interest of the bidding banks and increase the profits of participating banks. Therefore, it enables the banks to allocate more local government bonds, which ties the interests of local governments and banks more closely. Under the current institutional arrangement, local governments will intervene in local bond issuance selectively and moderately only when risks are perceived. As collaborators, local governments have the incentive and ability to intervene in the issuance of local government bonds. In some cases, the regulations that central government holds local governments officials accountable have instead served as an incentive for local governments to intervene in bond issuance. Therefore, it is necessary to further deepen the reform of local debt governance system and optimize bank asset allocation, so as to build a benign interactive relationship between local governments and banks.
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Received: 30 March 2021
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