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  • We would like to thank the editors and three anonymous referees for very helpful comments and suggestions that substantially helped improve the paper. We also thank Haibo Feng and Baoyun Qiao for providing some of the data; seminar participants of the 2012 International Workshop on Regional, Urban, and Spatial Economics in China at Jinan University and the 2012 Chinese Economists Society Annual Conference for helpful comments and suggestions. We are grateful for the financial support from the Lincoln Institute of Land Policy through its China International Fellowship Program. This research is also supported by Program for New Century Excellent Talents in University (NCET-13-0573), the Fundamental Research Funds for the Central Universities, and the Research Funds of Renmin University of China. [Correction added on August 1, 2014, after first online publication: Acknowledgement footnote updated.]


This paper aims to provide empirical evidence on the extent and possible channels of tax competition among provincial governments in China. Using a panel of provincial-level data for 1993–2007, we find strong evidence of strategic tax interaction among provincial governments. Tax policy is approximated by average effective tax rates on foreign investment, taking into account the tax incentives available to foreign investors. In line with the predictions of the theoretical tax competition literature, we also highlight the impact of each province's characteristics (including its size and level of industrialization) on the strategic interaction with its neighbors. Finally, the paper explicitly identifies the establishment of development zones as an important conduit for tax competition among provinces.