A Brief Discussion on the Optimal Degree of Finance Decentralization

Abstract

The effective economy must be able to allocate resources, opportunities,risks,and furthermore social power effectively. From the aspect of finance, how to allocate the tax revenue between central and local statement and make it optimal will influence the enthusiasm of central and local statement to supply demanded public goods for economic activities. The analysis of the Cobb-Douglas production function on the variables of the national public goods, the local public goods and the private capital reveals that the degree of finance decentralization is optimal when the proportion of the tax revenue possessed by the local government equals to the rate of the elasticity of the local public goods to the sum of the elasticity of the local public goods and the elasticity of the national public goods.