This paper presents a general-equilibrium model where human capital investment increases specialization and exposes skilled workers to region-specific earnings risk. Interjurisdictional mobility of skilled labor mitigates these risks; state-contingent migration of skilled labor also improves efficiency. With perfect capital markets, labor-market integration raises welfare and reduces ex post earnings inequality. If instead human capital investment can only be financed through local taxes, labor-market integration leads to interjurisdictional fiscal competition, shifting the burden of taxation to low-skilled immobile workers. Decentralized public provision of human capital investment creates earnings inequalities and is inefficient. (JEL H00)
Guillém López i Casasnovas, Esther Martínez Garcia
The authors analyse the magnitude and composition of the fiscal imbalance between Catalonia and the Spanish Central government for 1995-1998, and its evolution since 1986. A flow approach is adopted, whereas the usual incidence hypothesis is followed in alloating tax revenues. The results show a rather stable net contribution of Catalonia to the Spanish Central government in 1998 of 1.3 trillion pesetas (8.37% of Catalan GDP). Calalonia participated in 19.60 % of Central government revenues, but received only 15.03% of expenditures. Catalan population is 15.5% of the Spanish total. Overall, in 1994 constant terms, the evolution of the per capita imbalance rises from 117,133 PTAs. in 1986, to 192,294 PTAs. in 1998. The authors also introduce an explicit way to deal with the effects of Central government budget deficits on fiscal revenues, in computing the financial distortions of the political and economic central role of Madrid, different tax compliance among regions, the impact of inflation differentials, and the evaluation of the social security flows on regional imbalances. In general, the authors favour an estimation of the amount of revenues at the disposal of Catalonia in order to finance its own expenditure, without the mediation of the Central government, but maintaining a single Spanish fiscal system. This approach may force the contribution of Catalonia as any other region to finance the joint expenditures of the Central government, and/or to finance its owm public sector, but in a rather more dear way. As a result, with regard to the financial decentralization system, territorial solidarity and social cohesion is enhanced, at the same time that autonomy and self-governance,
in a better way than it is today.
Problems of `soft budget` constraints in intergovernmental relationships are currently at the frontier of research in local public economics. This paper reviews the Italian experience in the field, starting from the mid-1970s up to the present period, compares it with that of other countries, and uses it to comment upon the state of the literature. The paper argues that the soft budget constraint problem has been a rampant one in Italian local public finance, generating efficiency losses, lack of political accountability and undermining the soundness of public finances. The paper inquires into the causes and possible solutions to the problem, and in particular describes and comments upon the decentralization process of the 1990s. Finally, the Italian debate on fiscal federalism of the 1990s is also reviewed, arguing that some of the suggestions of this debate may be of interest more generally.
In continental Europe, the unemployment rate has risen continuously from a low level of below 3 percent in the early 1970s to more than 10 percent in the late 1990s. If those who are in governmental employment schemes and in early retirement are included, the unemployment rate runs as high as 20 percent in quite a few European countries, including France and Spain. The basic rule for a stable employment situation in an economy is: nominal wages should stay in line with labor productivity growth plus the increase in producer prices. In a situation of high unemployment, however, when the unemployed are to be integrated into the labor market, the productivity rule has to be modified: the increase in real wages should stay below the productivity growth rate until a satisfactory level of employment has been obtained. The most elegant approach to creating more employment is to improve labor productivity. If an economy succeeds in raising labor productivity, there is more scope for real wage increases or for more employment. We should, however, not overestimate the potential of an economy to increase labor productivity. If we want to integrate the unemployed, average labor productivity in the economy is likely to decrease. We should be realistic enough as to expect trends in Europe to be similar to those in the United States, where labor productivity per hour has increased by less than 1 percent per year since 1980. The task for Europe is to change the institutional setup of labor relations, to move wage formation closer to the market process, and to allow greater wage differentiation. It is unlikely that the "social partners", i.e., the trade unions and employers' associations, will be able to change the rule system sufficiently. Therefore, it is necessary to change the legal rules, especially those in favor of the unemployed, for instance, by introducing a legal right for each individual to enter the labor market at a wage of his or her choice. If continental Europe wants to reduce unemployment, it will have to change the impact of the welfare state. With respect to the level of benefits provided by unemployment and health insurance, a distinction should be made between large risks and small risks for the individual. Such a distinction between large and small risks would allow the costs of the social security system to be reduced, thus lowering the tax on labor. Insurance against large risks would be mandatory, small risk coverage would be optional. With respect to financing the welfare state, more choice should be given to the individual as concerns the insurance coverage that he/she desires. One serious issue concerning social welfare payments is determining the extent to which the level of social welfare benefits should be scaled down for those who are able to work in order to increase the incentive to work and the intensity of the search for work. A related issue is whether unemployment benefits should be reduced in their level or in the length of time they are paid in order to intensify the job search and reduce the reservation wage. • Shifting the employment issue to the EL) level would take attention away from the need to decentralize wage formation, i.e., to negotiate wages at the level of firms. It would be an incentive not to undertake the necessary steps to solve national unemployment problems and it would shift the financial burden to those countries that are successful in reducing unemployment. It would elevate the national labor market cartels to the EU level and it would blur the lines of responsibility. National governments would shift their responsibility to the EU level. This would be an extremely dangerous development for European integration because the European cause would become the scapegoat of failed national policies.
Local governments (LGs) are seen as producers of the local public good ('the good'). An authoritarian country is one in which the government decides if the good should be produced and how much to tax to finance it, as versus a democracy in which voters decide. This paper identifies conditions under which it is more efficient for a non-democratic government to delegate to the LGs the authority to 1) decide whether or not to produce the good and2) Collect tax to finance it if the good is produced. Two conditions are identified First, when the net benefit of producing the good is sufficiently small so that, compared with the benefit, inducing LGs effort under the centralized system is too costly (a moral hazard problem). Second, when the net benefit of the is higher in a locale with a higher production cost parameters, making it difficult for the center to induce the LGs to truthfully reveal the cost parameter (an adverse selection problem). These results are consistent with the experience of China in the past several decades, where "too small to be worth bothering" and "too diversified and complicated local conditions for the center to know" have been the two most prominent official arguments made by the communist government itself for decentralization
Financing Decentralized Expenditures presents new original research papers on the structure of intergovernmental fiscal relations in virtually all types of countries and the design and implementation of transfer mechanisms between different levels of government.
public good whereby the sum of the marginal rates of substitution between the public good and some numeraire private good for all agents who benefit frqm the public good must be equal to the corresponding marginal rate of transformation, i.e., XMRS = MRT. This rule can be implemented in a decentralized fashion if the government has enough financing instruments available, e.g., person-specific lump sum taxes and government debt. However, whether or not the first-best benefit rule can be implemented when the government only has control over relative prices is an open issue. Pigou (1947), Diamond and Mirrlees (1971), Dasgupta and Stiglitz (1971), Atkinson and Stern (1974), Pestieau (1974), and more recently, Wildasin (1979, 1984, 1985), King (1986), and Batina (1987) have considered the effect of decentralizing the government's policy on the optimal first-best benefit rule for a public good. It is generally true that if the government cannot completely control the economy because of a lack of policy instruments, then the first-best benefit rule governing the provision of the public good must be modified as a result.