Abstract: Different from the previous studies， this paper takes spatial external effects into consideration in terms of the relationship between financial expenditure competition and regional capital allocation efficiency. The capital allocation efficiencies of 31 provinces in China are calculated and compared based on Wurglers model. Furthermore， an empirical test about the effect of financial expenditure competition on capital allocation efficiency is given using the spatial econometric model. The results indicate that on the national scale， capital allocation efficiency has negative correlation with space while financial expenditure competition has a significant impediment to regional capital allocation efficiency in the whole country. The grouping estimation shows that there is an obvious difference between the eastern regions and the mid-western regions， and the financial expenditure competition in the east is beneficial to improve the capital allocation efficiency while in the mid-west it distorts the direction of capital flow and reduces the capital allocation efficiency to some degree.

Key words: financial expenditure competition, capital allocation efficiency, spatial external effect