In the past two decades, China has undertaken a fiscal reform called province-managing-county reform, which aims to improve fiscal administrative efficiency by flattening government layers. This reform provides a quasi-experiment setting to examine how the reduction of government layers affect the composition of fiscal transfer at county-level governments in China. Using a panel data of 108 counties in Henan Province from 2000 to 2007, the paper exploits difference-in-differences approach to conduct the empirical analysis. The results show that the decrease of the proportion of tax rebates and the increase of equalizing transfers are greater in reformed counties than those in non-reformed counties. As the tax rebates exhibit an anti-equalization effect, the tradeoff between these two categories of fiscal transfers suggests that the PMC reform helps improve the equalization effects of fiscal transfers among county governments.
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