Before we can evaluate the performance of local governments, we must first understand what their responsibilities are and how financial and administrative responsibilities are allocated among different levels of government. To provide a backdrop for the book's analysis of village governmental public goods provision, this chapter briefly sketches the broader institutional context in which local governments operate.

Examining these institutional arrangements inevitably brings us up against one of the central dilemmas of governance: what is the best way to divide up responsibilities for public goods provision among different levels of government? Proponents of decentralization argue that local governments should have primary responsibility for providing public goods for the citizens under their jurisdiction. They have more information about what citizens really need and want. When local governments are responsible for providing roads, schools, and other services, citizens know exactly whom to blame when something goes wrong. Competition for tax revenue, moreover, can keep local officials on their toes since taxpayers can always move to another locality that provides better public services more cheaply.

China's extraordinary economic growth over the last few decades seems to suggest that decentralization in this case has been a success story. But counter to what optimistic theories of decentralization predict, problems of local governmental accountability and fiscal mismanagement have also increased. Decentralization programs in China, as in many other countries, have increased unfunded mandates for public goods provision for all local levels – all levels below the central government but especially the lowest levels.