This paper studies the education policy choices in a decentralized economy with two levels of governments and regional income disparity.We employ a dynamic game model incorporating overlapping generations to analyze the optimal education spending of the central and local governments,and the subsequent effects of such financing arrangements on the dynamics of regional income distribution.We show that,whether the central government should provide public education and what level should be provided would depend on the extent of regional disparity.Only when the disparity is large could the provision of public education by the central government improve social welfare and reduce regional disparity over time.The optimal education expenditure of central government,however,does not monotonically increase with the extent of regional disparity.Finally,policy implications for China are discussed.
Cinzia Di Novi, Massimiliano Piacenza, Silvana Robone, Gilberto Turati
This paper aims at investigating empirically the impact of fiscal decentralization reforms on inequality in well-being. In particular, we look at the effects on health inequalities following the assignment of larger tax power to the Italian Regions for financing their health expenditure, starting from the end of the Nineties. Exploiting large differences in the size of the tax base across Regions, we find that fiscal decentralization processes that attribute a greater tax power to lower government tiers, besides reducing inefficiencies of healthcare policies, seem to be effective in reducing also within-regional disparities in health outcomes. However, the degree of economic development � on which depends the actual fiscal autonomy from Central government � significantly affects the effectiveness of these reforms and highlights the importance to take properly into account the specific features of the context where the decentralization of power is implemented.
Over the last years, scholars looked at the decentralization of competences as a possible solution for several issue of public finance. Despite the development of a new branch in fiscal federalism theory (the so-called Second Generation Theory), the homogeneity of preferences at local level still represents one of the main assumption in this literature. This hypothesis allows assuming that a local allocation of public services minimizes the welfare losses that a central allocation could generate. The present contribution tries to underline how the homogeneity of preferences continues to represent a central topic in fiscal federalism theory, finding in the information issue a kind of trait d'union between them. Moreover, by means of an empirical analysis on the Italian case, we will try to analyze if individual attitudes towards a public management of local ser- vices present a greater heterogeneity at macroregional (NUTS1) or regional (NUTS2) level.
This paper models the local tax mix determination process in the presence of statewide fiscal limitations—the decentralized government finance archetype—and shows how excess sensitivity of local public spending to grants (the conventionally and somewhat misleadingly termed “flypaper effect”) arises in the constrained tax mix irrespective of whether lower or upper limits bind and how it cannot, in general, be taken as a symptom of local government overspending. An empirical application to Italian province panel data provides consistent evidence of the role of corner solutions produced by two-sided tax limits in explaining the sensitivity of local public expenditures to grants.
Vertical decentralization, either at the deconcentration, delegation or, more rarely, the devolution level, has been instituted in most countries of Sub-Saharan Africa. It usually has the effect of increasing the quantity as well as the quality, in terms of health and education, of public goods. More neglected in the literature is the issue of horizontal decentralization, shifting the decision-making power from the central ministry of finance to the ministries of education and health, as well as strengthening the legislative and judicial branches of government. We examine the relationship between horizontal decentralization with its important ethnic dimension and vertical decentralization. Local governments are accountable to the center under vertical and to democratic forces and civil society under horizontal decentralization. Smaller local units are more likely to be more homogeneous ethnically, leading to a larger quantity and higher quality of public goods.
Андреас Каппелер, Albert Solé Ollé, Andreas Stephan, Timo Välilä
The aim of this paper is to analyze the effect of revenue decentralization on\nthe provision of infrastructure at the sub-national level. We estimate the effects of revenue\ndecentralization and earmarked grant financing on the level of sub-national infrastructure\ninvestment in 20 European countries over the period 1990-2009. The results are interpreted\nin light of the predictions of the theory on fiscal federalism. We find that it is sub-national\ninfrastructure investment that increases after revenue decentralization and not investment in\nredistribution. However, the effect of revenue decentralization is lower the higher the use of\nearmarked grants to fund infrastructure investment
We contribute to the literature on the political determinants of regional financing by analyzing the case of Spain, a largely decentralized country. Using a dynamic panel data model, we argue that the rise in relative bargaining power of regional parties in Spain can partly explain the increase in budgetary allocations to regions observed during the period 1986 – 2006. In particular, our results show that the rise in parliamentary representation of the nationalist Catalonian party, measured by the Banzhaf voting power index, has been a significant factor in ensuring increasing financial resources to regional governments. In addition, the traditional hypotheses of the political economy literature on legislative apportionment are tested for the case of Spain, with no significant results observed. The overall distribution of regional financing in Spain seems to be in general well aligned with the basic economic principles of efficiency and equity recommended for such a system.
Recent reforms of the National Health Service (NHS) financing system in Italy (D.Lgs. 446/97 and D.Lgs. 56/2000) have potentially given more responsibility for health care to Regions, increasing their power over this function. Starting from this normative process, the aim of the paper is to analyse the Italian health spending in the Ordinary Statute Regions (OSR), by proposing a model to verify empirically whether the financing mechanisms are actually defined at local level or if Regions act as agents of the central government. The empirical results do not support the evolution of fiscal federalism in the health sector, highlighting in fact that health financing decisions are mostly centralized in Italy, even if the institutional context has recently moved towards decentralization of health financing sources, extending the autonomy of sub-national governments.
We study overborrowing and financial crises in an equilibrium model of business cycles and asset prices with collateral constraints. Private agents in a decentralized competitive equilibrium do not internalize the effects of their individual borrowing plans on the market price of assets at which collateral is valued and on the wage costs relevant for working capital financing. Compared with a constrained social planner who internalizes these effects, they undervalue the benefits of an increase in net worth when the constraint binds and hence they borrow "too much" ex ante. Quantitatively, average debt and leverage ratios are only slightly larger in the competitive equilibrium, but the incidence and magnitude of financial crises is much larger. Excess asset returns, Sharpe ratios and the market price of risk are also much larger. A state-contingent tax on debt of about 1 percent on average supports the planner's allocations as a competitive equilibrium and increases social welfare.
Government spending on health has grown as a percent of GDP over the last 40 years in industrialized countries. Widespread decentralization of healthcare systems has often accompanied this increase in spending. In this paper, we explore the effect of soft budget constraints on subnational health spending in a sample of OECD countries. We find countries where subnational governments rely primarily on central government financing and enjoy large borrowing autonomy have higher healthcare spending than those with more restrictions on subnational government borrowing.
- This paper reviews main motivations behind the constitution of local councils partnerships as they serve to devise decentralization pitfalls in order to the optimal dimension of government. To this aim, the paper focuses on one of such partnership, namely Unione di Comune (UdC). Some stylized facts are derived with regard to dimension, functions and finalities of Italian UdC and structural characteristics of associated councils. The financing issue has been analyzed under the heading of both ensuring adequate funding to promote partnerships and avoiding pressure on the national government's budget and public finance in general. Theoretical considerations and empirical experience from abroad, such as inter communality in France, show that the assignment of an autonomous tax proves to be more efficient compared to una tantum or annual transfer or tax sharing. Finally, the paper offers an insight into the way UdC provides administrative functions and public services by mean of the Marche Region case study.
We consider the regulation of national firms in a common market. Regulators can influence the production of national firms but they incur in a positive cost of public funds. First, we show that market integration is welfare improving if and only if the efficiency gains compensate for the negative public finance effect (related to business stealing). We also show that supranational competition can have very different consequences on the rent seeking behaviour of firms, depending on cost correlation and ex-ante technological risk. Finally, we characterize the global optimum and show how it can be sustained in a decentralized bargaining solution.
In this paper, we analyze a class of models in which there are interjurisdictional spillovers among heterogeneous jurisdictions, as illustrated for instance by CO2 emissions that affect the global environment. Each jurisdiction's emissions depend upon the local stock of private capital. Capital is interjurisdictionally - mobile and may be taxed to help finance local public expenditures. We show that decentralized policymaking leads to efficient resource allocations in important cases, even in the complete absence of corrective interventions by higher - level governments or coordination of policy through Coasian bargaining. In particular, even when the preferences and production technologies differ among the agents, the decentralized system can still result in globally efficient allocation.
This paper is devoted to discuss some European evidence of decentralized public finance, as they may prove useful to give some suggestions for implementing the Italian current proposals of more fiscal decentralization. Except than in Nordic countries, new settlements of fiscal decentralization are planned or underway almost everywhere in main European countries, and not just in Italy. A common trend may be envisaged toward an increase of sub-national functions, while the way to more fiscal autonomy seems more uncertain. A prevailing mixed model (decentralization with scattered elements of political federalism) seems to emerge. However expenditure overlaps are so widespread to cancel out the popular idea that functions (exclusive or concurrent) may be allocated among government layers in a clear-cut way. In the average of EU15 countries, the financing of sub-national governments comes still largely from national block transfers highly perequating. A trade-off seems to exist, not easy to be removed, between the degree of decentralization and the room of manoeuvre of decentralized taxes. Following the European experiences, more autonomous financing might be obtained mainly by enlarging sub-national governments’ rate-freedom with respect to increased amount of national taxes (personal income tax and VAT) to be shared. Perequating systems widely differ among countries. Some recent reforms may however give some useful guidelines for a dualistic country as Italy. Transfers should be of vertical type, linked also to the regional needs and at least for a part targeted to specific aims. Fiscal decentralization may induce a decrease in overall budget responsibility. To control for this, international experience suggests that fiscal rules might be usefully integrated by formal cooperation between central and sub-national governments. Codici Jel H70, H72, H74, H77 Parole chiave:Federalismo fiscale; Italia; Europa Indirizzi E-mail : eunice@unipv.it, gandull@csb-scpo.unige.it
This paper reviews the economic rationale for and against decentralization with particular attention to the organization and delivery of education. The paper frames the overview within the standard efficiency-equity trade off and highlights the increasingly important role of incentive mechanisms, accountability, and citizens' participation. The discussion then turns to the issues that are specific to decentralizing education, including the pros and cons of financing schools from local taxes, and a taxonomy and description of institutional arrangements around the world. A brief review of evaluation studies of decentralization reforms in education concludes the paper.
This paper studies optimal earnings taxation in a three period life cycle model where the taxes raised to finance an exogenous amount of public expenditure are allowed to be differentiated across ages. Agents choose their level of education when young and their age of retirement when old. We first look at the problem of optimal taxation when the young can borrow and then turn to the case where young face borrowing constraints. It is shown that, without borrowing constraints, a first best optimum can be decentralized by setting a zero tax rate in the third period and a first period tax lower than the second one.\nWith the borrowing constraint, the government may not be able restore intertemporal efficiency in which case a zero tax rate when old may not be optimal.
In this paper we analyze the optimal degree of centralization for the supply of public goods. We identify the reliance on an exclusion mechanism as a central feature of the decentralized provision of public goods. An exclusion mechanism induces a contest between users of the public goods who want to free ride and the providers who want to exclude free riding. This contest explains the costs of decentralization. A centralized contribution does not rely on an exclusion mechanism to finance the public goods but on taxation which induces different types of transaction costs. A comparison of the relevant distortions explains the optimal degree of centralization of the supply of public goods.
Teresa García-Milá, Timothy J. Goodspeed, Therese J. McGuire
As part of a process of democratization, many countries spanning Europe, Latin Amertica, Africa, and Asia are reorganizing their governments bydevolving fiscal responsibility and authority to newly empowered regionaland local governments. Although decentralization in each country proceedsdifferently, a common element tends to be an initially heavy relianceon central government grants to fund regional spending. We develop atheoretical model of regional borrowing decisions in which the incentivesfor regional borrowing depend crucially on how the regions expect thefederal system of finance to evolve. We examine the implications of themodel using data on Spanish regions for the period 1984-1995 and findevidence that regions may be borrowing inefficiently in response toincentives imbedded in the Spanish system of fiscal decentralization.