Abstract: Employing the county-level data from 1994 to 2007, viewing the fiscal self-sufficiency rate as the threshold variable and based on the Dual Panel Threshold Model, this thesis analyzes the non-linear relationships between the transfer payments and local public expenditures in our country. The findings demonstrate that there exists significant threshold effect among the effects of transfer payments on the local public expenditures; transfer payments facilitate the capital construction expenditures and the administration expenditures more significantly , and to an extent, strengthen the distortion in the behavior choices as well as in the public expenditure structure on the part of local governments. Regional disparities exist among the effects of transfer payments on public expenditures; transfer payments can not effectively encourage the economic less-developed regions to provide basic public services, and thus in some sense, transfer payment system is incompatible with the goal incentives arising from the equalization of basic public services.

Key words: transfer payments, public expenditure, fiscal self-sufficiency rate, equalization of basic public services, panel threshold model