Abstract:With the data of prefecture-level cities from 1997 to 2012, the paper tests the impact of local fiscal pressure on investment diversity and the related transmission mechanism by constructing an intensified DID model based on the Income Tax Sharing Reform. The results show that local fiscal pressure has a significantly negative effect on investment diversity. With the constraint of fiscal budget, local governments are more likely to increase investment on the real estate industry. However, the effect of local fiscal pressure on investment structure demonstrates heterogeneity among different regions. Developing regions are more responsive to local fiscal pressure by investing more on the real estate industry. Whereas, the developed regions are inclined to diversify the investment and hence enlarge the tax base in order to relieve fiscal pressure. A further step to optimize the tax sharing system as well as initiate new local taxes are effective to relieve fiscal pressure, and in return, change the real estate industry-based investment structure.