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)
Active tax competition, in short, tends to produce either a generally low level of state–local tax effort or a state–local tax structure with strong regressive features . George Break (1967) The mobility of individual economic units among different localities places fairly narrow limits on the capacity for local income redistribution . Wallace Oates (1977) Policies that promote residential mobility and increase the knowledge of the consumer–voter will improve the allocation of government expenditures in the same sense that mobility among jobs and knowledge relevant to the location of industry and labor improve the allocation of private resources . Charles Tiebout (1956) If jurisdictions compete with each other and taxpayers/consumers are able to vote with their feet, there may be fairly strong pressures for subnational governments to respond to the wishes of the electorate . Charles McLure, Jr. (1986) Assignment of Government Functions and Mobility Assignment of Government Functions Issues of public finance appear in a new light when an economy is divided into several regions. If a state consists of many jurisdictions, the question arises of how to assign the various government activities to different governmental levels. The general functions of the government – to support an efficient allocation of scarce resources (where the private sector fails to do so) and to guarantee a fair income distribution – must first be divided into several components. Once a fundamental line of government policy is chosen, these functions must be assigned to the jurisdictions.
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.
This short note provides a framework for looking at public sector governance and productivity improvements. It argues that the role of government in enhancing productivity growth is two-fold. First, government should provide an environment that is conducive in improving total factor productivity in private sector production. Second, government should work to increase the productivity of the public sector itself. In terms of providing the appropriate economic setting that is favorable to private-sector-led development, government needs (1) to provide the macroeconomic and the microeconomic environment that will establish incentives for firms/individuals to act in accordance with the invisible hand had there been no market imperfection, (2) to provide the institutional infrastructure (i.e., property rights, law and order, rules and even application and enforcement of the same) that markets need to work efficiently; and (3) to ensure the financing/provision of adequate basic health care and education, and basic physical infrastructure (World Bank 1992). In particular, the instruments that government may use in this regard are include (1) direct government interventions in the product markets as defined by the regulatory structure in strategic sectors, and (2) economy-wide policies like financial liberalization, trade liberalization, and foreign investments liberalization. On the other hand, (1) budget reform (2) the installation of a system of performance measurement and incentive in the public sector, (3) the re-engineering of the bureaucracy, (4) the combating of corruption, and (5) decentralization are the key features of a program that will increase the productivity of government operations.
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.
The Public Finance Department of the University of Economics in Prague (VŠE Praha) recently held an international conference on Theoretical and Practical Aspects of Public Finance. The main topics discussed were the public and the taxation sectors' respective decentralization, efficiency, and financial instruments. Economists from England, Czech Republic, Scotland, Italy, Belgium, Russia, Slovenia, Turkey, Slovakia, and several international organizations were present.
As the world's economy marches toward globalization, people are debating globalization's effect on the poor in developing countries. Will the developing countries be left behind? How can they be helped? What does globalization have to offer them? Since most of the countries in the Latin America and Caribbean region are considered developing countries, the issue of these effects is especially pertinent and it formed the focus of the discussions at this conference. This publication presents some of the papers submitted at this annual conference, the fifth one focusing on developing economies in the region. The 1999 Proceedings talks about decentralization and the need to bring government closer to the people in a rapidly changing global economic environment. For developing countries to realize the power of globalization, they need to concentrate on the power of decentralization, that is, getting their citizens involved in their own development and defining their own future. The aim of these discussions and this publication is to impart the knowledge needed to turn globalization into an asset rather than a liability. To accomplish this goal, the publication focuses on three subject areas: a framework for fiscal federalism; sectoral issues; and local financing and management capacity. This publication will be of interest to academics, policymakers, and decentralization experts.
Corruption and targeting failures in the delivery of public services in developing countries has frequently been argued to result from absence of controls on the behavior of central bureaucrats delegated authority over their implementation.This has motivated recent initiatives towards decentralization of service procurement and delivery to elected local governments that are expected to be more accountable to user interests.However, if local democracy is prone to capture by local elites, decentralization can also be subject to diversion and targeting failures.This paper presents an analytical framework to evaluate the resulting trade-off, and predict the effects of decentralization on volume and allocation of service delivery under different financing mechanisms.
This paper discusses a general equilibrium model of an economy with multiple separately provided public projects. We assume an additively separable cost structure and consider valuation equilibria with separated finance systems, one for each collective good. Under non‐Euclidean representation we show the decentralization of Pareto efficient allocations by valuation equilibria and the equivalence of the core and the set of nonnegative valuation equilibria. In the case of Euclidean representation, every Pareto efficient allocation is shown to be supported as an affine valuation equilibrium that is characterized by a personalized price per unit of each public good and a personalized lump sum tax or subsidy. These results complement and clarify already established insights into Lindahl pricing and its generalizations developed in the literature.
Fiscal Decentralization is a popular economic development strategy among transition and developing countries. This article reviews the advantages of fiscal decentralization in a theoretical context, but critiques the relevance of the standard theory of federalism as it applies to emerging economies. It is argued that the macroeconomic benefits of fiscal centralization, the absence of good instruments of local government finance, and the centralist politics that characterize most low income countries have been strong enough to hold back increased emphasis on local government finance.
To shed light on decentralization in Russia, the authors examine intergovernmental fiscal relations within regions. To analyze trends, they review channels of fiscal allocation within regions - tax sharing and local transfer schemes. To evaluate the potential impact of various fiscal decentralization patterns on regional economic performance (including growth and the budget deficit), the authors study data on the structure of 89 Russian consolidated regional budgets for 1992-96. They find that local governments'relative share of Russia's consolidated budget, although substantive (roughly a quarter of the total budget), did not expand after 1994. The federal government's relative role in financing public goods and services declined as the relative role of local governments increased substantially. Local governments collected more revenues in 1996 (6.4 percent of GDP) and spent more than regional governments. They also substantially increased social financing (including health, education, and social protection). Russia made no progress toward a more transparent system for tax assignments. The average level of expenditure decentralization is similar for ethnically Russian regions and national republics and"okrugs"but revenue arrangements differ greatly."True"decentralization has taken place in"oblasts"and"krais"where local authorities are provided with a bigger share of sub-national tax revenues. A redistribution model applies in republics and autonomous okrugs, where greater local outlays have been financed through larger transfers from regional governments. Regions near each other tend to have similar budget arrangements - the result of intensive interactions between neighbors and probably supported by the activities of regional associations. The size of a region's territory does not influence decentralization outcomes. Fiscal decentralization seems positively related to the share of education spending in regional budgets. And regions with more decentralized finances tend to experience less economic decline. But budget control is weaker in more decentralized regions. Instability and lack of transparency in intergovernmental fiscal relations provide sub-national governments little incentive for responsible fiscal policy. Further decentralization without greater transparency could bring greater debt and deficits.
Fiscal decentralization has been an important topic among public finance economists for nearly 40 years now, but recently it has become important in the real world as well. The United States has, in effect, implemented a decentralization strategy as it has tried to cut its federal government budget deficit, largely by reducing state and local grants. For Canada, fiscal decentralization is tied up closely with the Quebec issue, and, for Germany, with the unification issue. The European Community is beginning to worry about fiscal decentralization issues in connection with policy harmonization—what policies and/or conventions should be harmonized and what need not be? Many developing countries are also groping with decentralization issues as they try to find a way to manage the public sector side of their growth process. Decentralization has always been understood to mean the proper location, by level of government, of various taxes, spending programs, grants, and regulations. What types of spending should be conducted by what levels of government, what types of taxes should be assessed by what levels of government, how should grants help fill in gaps, and how should regulations be harmonized? On the one hand, taste differences across jurisdictions argue for separate policies—governments in jurisdiction x should do what the voters in jurisdiction x want. On the other hand, the existence of benefit spillovers across jurisdictions and the potential migration of taxpayers and spending beneficiaries across jurisdictional lines make things complicated.
After years of debate, there is still much disagreement about the economic impacts of highway infrastructure. This article suggests that recent empirical evidence can help reconcile the divergent views on the role of highways in the economy. The resolution illuminates two ideas that should be more prominent in transportation policy. First, highways are associated with both local economic gains (often near a project) and economic losses (often distant from a project). In a system of centralized highway finance, this creates the possibility of a geographic mismatch between the areas that pay for highway projects and the areas that benefit from those projects. Second, efficiently using the available highway capital is potentially as effective as building additional highway stock in enhancing the local economic impacts of highways. Both ideas suggest the need for more decentralized, project-specific highway finance that includes a role for efficient pricing. The policy implications of a more decentralized highway finance system are discussed in the closing section of the article.
During the five-millenium history of Korea, 1995 was the first time mayors and governors were elected by local residents, instead of being appointed by the central government. This could be the starting point of fiscal decentralization in this country, and, whether intended or not, this has the potential of enhancing allocational efficiency through the realization of local preference in the provision of local public services. Hence, this research aims to review and analyze the indigenous characteristics of the current local public finance system from the view point of the western normative theory, and develop a more equitable revenue sharing formulas to support Korean new fiscal decentralization. Since this is one of the first attempts to examine the evolving local autonomy squarely using the lens of normative theory of intergovernmental relations, its results could make a great contribution to the theory of local public finance in Korea. This research has developed two conceptual frameworks for the new revenue sharing formulas, and presented their aid simulations. The first model is the economic activity model, which tries to measure economic income of residents by measuring the level of economic activity in each jurisdiction. This model improves on the existing system, because it could motivate local governments to utilize the flexible tax rate system, and measure non-tax revenue as well. The other one is the expenditure need model, which measures the expenditure needs beyond local control in the form of expenditure need index. By controlling for expenditure needs beyond local control in the revenue sharing formula, mayors and governors could fairly compete with each other to provide better services with less cost. Unfortunately, lack of relevant data as well as service quality measures have confined this research to develop aid formulas for only garbage/road services instead of for overall local public services of city governments. This research finds that the fiscal capacity measure derived from the economic activity model and the expenditure needs indices from the expenditure need model are highly consistent with the reality of Korean city governments. Moreover, aid simulations for garbage/road services using the revenue sharing formula in this dissertation would result in a very different distribution of aid than the present formula. With the development of relevant data of service quality for local services, this approach could be a foundation for the new general revenue sharing formulas to support fiscal decentralization in Korea.
I construct an agency model of local public goods producers with special reference to public schools. The model assumes that households make Tiebout choices among jurisdictions, but it has more realistic assumptions about information and the cost of residential mobility. I examine producers' effort and rent under local property tax finance and centralized finance. I show that, if there are a sufficient number of jurisdictions to choose among, conventional local property tax finance substantially reduces the agency problem and associated loss of productivity. Specifically, I demonstrate that local property tax finance can attain about as much productivity as a social planner with centralized finance can, even if the social planner is armed with more information that a real social planner could plausibly have. The key insight is that decentralized Tiebout choices make some information the social planner would need verifiable and other information unnecessary.
Maria da Conceição Sampaio de Sousa, Francisco de Sousa Ramos
The importance of public expenditure in such social services as education and public health represent a decisive contribution to a nation’s progress. A major problem is how to allocate government spending in such a way as to provide public services efficiently. In a political federation as the Brazil, the critical issue becomes the choice of the degree of decentralization in the provision of public services. Decentralization is advantageous in the production and distribution of public services due to: i) the proximity of users facilitates the ranking of the priorities; ii) it is easier to control the use of resources; Hi) the requirements of managerial capacity are lower. In this paper we assess the performance of Brazilian municipalities regarding the utilization of public revenue. The paper inquires whether, for a given availability of services, local governments minimize the expenditure needed to finance those services. To answer these questions, a cost-efficiency frontier will be determined by using various techniques of efficiency analysis: two DEA variants — DEA-F and DEA-V — and the FDH approach. Our results suggest that the Brazilian recent municipal decentralization policy does not lead to an efficient use of public resources. The outcome of this policy was a proliferation of small municipalities that, due to their size, do not benefit from the economies of scale inherent to the production of certain public services. They tend to operate with higher average costs thus bringing about a considerable waste of resources, which can be inferred by estimating the excessive public spending that characterizes those cities.