Blockchain Papers

Susumu Sato

No abstract is available for this record.

Alec Ian Gershberg

While the theoretical arguments for fiscal decentralization developed over the past thirty-five years have proven compelling enough for the concept to win great favor, very little empirical work has proven the merits of such policies in the forms governments have actually implemented. We examine the results of educational fiscal decentralization in a developing country with an established framework for fiscal federalism and a concomitant history of intense centralization. The structure of the flow of funds in the Mexican education sector provide an example to study: (1) the importance of the spatial distribution of outcomes resulting from expenditures rather than simply the distribution of the expenditures alone; (2) the distribution of resources to subnational political units; (3) intergovernmental relations and the resulting incentive structure for service provision, particularly with respect to fiscal transfers and grants administration; (4) the effects from decentralization efforts over the past decade, and the resulting implications for probable outcomes from efforts to decentralize; and (5) the interplay of centralized versus decentralized finance and administration. We develop methods to analyze political and socio-economic factors that affect intergovernmental fiscal allocations. The results show that (1) the Federal Government does trade some efficiency for the sake of distributional concerns in the provision of educational resources, but in doing so may discriminate against subnational jurisdictions based on factors like voting behavior or marginalized minority populations; and (2) the pattern of Federal-to-state allocations may not be replicated at the state-to-municipal level, even by Federal agencies at the state level. We also provide evidence that states may not currently be as effective educational providers as the Federal Government, raising concern for efforts to decentralize. Policy implications and recommendations resulting from Mexico's experience revolve around the development of an accountable matching grant mechanism for fiscal transfers that would retain those aspects of centralized financial control beneficial to efficient and equitable service provision, while stimulating the improvements that may result from augmenting regional and local fiscal and administrative responsibilities for education.

Ian King

The feasibility of the policy of perpetual debt financing, given a particular path for expenditures and taxation, has been questioned over the years. Sargent and Wallace [17] argue that such a policy is not feasible in the sense that the debt/GNP ratio will explode. McCallum [8] and Darby [2] argue that this policy will be feasible if and only if the long-run growth rate of GNP exceeds the after-tax real interest rate. This particular condition was derived under the assumption of Ricardian equivalence, where the growth rate of GNP and the interest rate are exogenously given, and are not affected by the path of debt. Miller and Sargent [9] and Weil [20] make the point that once the assumption of Ricardian equivalence is dropped, then simple comparisons of long-run growth rates and interest rates are not sufficient to determine stability. Tirole [19] and O'Connell and Zeldes [10] demonstrate in Diamond's [3] model, without Ricardian equivalence, that Ponzi games such as this are feasible if and only if the economy is dynamically inefficient without debt. All of these studies assume that the long-run growth rate of GNP is exogenously given. This assumption is particularly strong in the absence of Ricardian equivalence. In a separate literature, a new generation of equilibrium growth models has recently been developed with positive sustained growth in the long-run equilibrium. In these models, long-run growth is endogenously determined, rather than being imposed on the model as some exogenously given process [7; 11; 12; 14; 15].1 All of these models find some way of introducing increasing returns to scale into the neoclassical growth model and yet preserving the fact that it can be interpreted as a decentralized equilibrium. This paper considers the feasibility of perpetual debt financing in an economy where the growth rate of GNP is endogenously determined and is a function of debt levels. The model of endogenous growth presented here is a modified version of the one given in Prescott and Boyd [12]. This particular model is chosen for two reasons. First, agents live for finite lengths of time; so Ricardian equivalence will not hold, in general, in this model. Also, the production function is linear in the capital stock; as will become clear below, this implies that the equilibrium paths of the state variables can be characterized as first order linear difference equations.

Daniel Berkowitz, Beth Mitchneck

No abstract is available for this record.

Robert Cervero

Over successive five‐year development plans, Indonesia has channeled large sums of foreign loans and domestic funds into water supply projects with the aim of providing clean water for a majority of households. Most projects have been planned and financed through the central government's public works ministry, though a growing share of rural water projects are being funded through earmarked grants provided to local governments. This paper examines how these central government transfers, in the aggregate, have responded to various indicators of expenditure needs. Overall, past allocations have matched existing demand and supply levels closely–funding has generally favored provinces with large populations, large numbers of water enterprises, extensive distribution networks in place, and high production capacity. They have not, however, worked in favor of either equalization or economic productivity objectives, as reflected by per capita income or GRDP growth rates. This analysis suggests that equity would be promoted either by including income‐related factors in future block grant allocation formulas or by shifting funding emphasis in the water supply sector from grants‐in‐kind controlled by the central government to sectoral grants controlled mainly at the local level. Such policy reforms would also further promote the nation's professed goal of decentralizing infrastructure development.

Vernon L. Smith

After providing… [public expenditure] … theory with its… optimal conditions, I went on to demonstrate the fatal inability of any decentralized market or voting mechanism to attain or compute this optimum [Samuelson, (1955), p. 35]. … to say that market mechanisms are non-optimal, and that there are difficulties with most political decision processes, does not imply that we can never find new mechanisms of a better sort [Samuelson (1958), p. 334]. Providing the [public] expenditure in question holds out any prospect at all of creating utility exceeding costs, it will always be theoretically possible, and approximately so in practice, to find a distribution of costs such that all parties regard the expenditure as beneficial and may therefore approve it unanimously [Wicksell (1896), pp. 89-90]. How much of this [the principle of unanimity and voluntary consent in taxation] … may be of practical use in the near future, men of affairs may decide [Wicksell (1896), p. 73]. INTRODUCTION The theory of public goods has, in the space of 20 years, revolutionized teaching and research in public finance, had a major impact on the content of microeconomic theory in general, and has provided, for many, the analytical foundation for an economic justification for the state. The most widely accepted proposition in contemporary public finance is the “fatal inability” of decentralized market or voting institutions to attain a Pareto-optimal allocation of resources when there are public goods.

Gordon Hughes, Stephen Smith, Guido Tabellini

Local government Gordon Hughes and Stephen Smith Many OECD countries are uncomfortable with the structure and financing of their decentralized governments. In some, the pressures for change have even led to tax revolts. Much of the existing economic literature on decentralization considers that the purpose of local governments is to decentralize decisions. Lower tiers of government are assigned local public goods and matching taxes. This contrasts with actual arrangements. The patterns of government decentralization in OECD countries are diverse. Most local governments in Europe actually perform a major administrative role, in effect acting as agents for the central government. While this is justified by the advantages that local governments have over central governments in terms of information and control by voters, such arrangements require large financial resources, and more control by central government than where local governments simply provide local public goods. A drawback is the potential for conflict between different tiers of government. The trend towards more decentralization, common to most countries, has had to be met by more taxation or more grants. The need for revenue has encouraged a move away from property taxes to broader-based local taxes. Tax-sharing arrangements have often been under-rated, but in practice they compare favourably with complex and discretionary systems of transfers between levels of government.

Mikko Puhakka, Randall Wright

The authors study an economy where externalities provide an explicit role for intervention and technology shocks generate aggregate uncertainty. In laissez-faire there is too much unemployment. However, the authors show how to support the optimal allocation as a decentralized equilibrium using a self-financing linear employment subsidy. Generally, this subsidy is a function of economic conditions, and they characterize the way in which it varies with the shock. A special case of the authors' results indicates that a simple restriction on technology, homotheticity, implies the optimal subsidy is constant or independent of unemployment. Copyright 1991 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

Klaus Conrad

The purpose of this paper is to compare the performance of some instruments of environmental policy, using data for a coal-fired power plant. Each decentralized scheme coverages towards the social optimum, chosen by a regulator. We look at the performance of a changing tax rate on emission, of an announcement of the tax formula, of an announcement of the tax formula with a tax refund possibility, and of a tax-cum subsidy scheme. Our emphasis is on full information concerning the tax and subsidy formulas and on the opportunity for the firm to optimize intertemporally. We also test two performance schemes which combine social optimal pricing with optimal abatement decisions. Our interest is to compare the speed of convergence of the schemes, the monetary side payments (subsidy, bonus) required, and to look for self-financing schemes.

Jonathan Levin

To measure subnational governments, only external money flows are counted, excluding intra-level transactions in measuring a level of government and all intergovernmental transactions in measuring general government. Control, finance, and administration should be distinguished in measuring centralization and each level’s share of general government, administered expenditures being net of grants given to other governments and financed expenditures net of grants received. Disparate decentralization of finance, control, and administration brings vertical imbalance, measured by the portion of a government’s expenditures not covered by its own resources and by the ratio of intergovernmental grants to total government expenditures.

Wolfgang Peters

The main purpose of this paper is to analyze problems of financing an old-age insurance when birth rates are low and population declines or fertility fluctuates with time. A government then searches for optimal policies to cope with such problems. A first criterion could be seen in the Pareto principle. But we all know that there is no way out of PAYG unless at least one generation has to pay for the transition. Therefore an optimal policy is concerned with intergenerational redistribution and optimal growth. In the absence of public pensions the economy will in the long run converge to a steady state which is not optimal in the sense of a golden rule. This dynamic "in"-efficiency results from the decentralized decision making by the consumers and the firms. If the PAYG system influences the savings ratio of the economy, public pensions can be seen as an instrument to implement a modified golden rule.

Robert J. Barro

One strand of endogenous-growth\tmodels assumes constant returns to a broad concept of capital. I extend these models to include tax- financed government services that affect production or utility. Growth and saving rates fall with an increase in utility-type expenditures; the two rates rise initially with productive government expenditures but subsequently decline. With an income tax, the decentralized choices of growth and saving are "too low," but if the production function is Cobb-Douglas, the optimizing government still satisfies a natural condition for productive efficiency. Empirical evidence across countries supports some of the hypotheses about government and growth.

Raymond G. Batina

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.

J. Fitz G Ford, John M. Quigley

This paper considers the relative centralization or decentralization of public finance, and relates the equity and efficiency issues to the special features of developing economies. The paper considers the centralization of taxation and service provision in Indonesia in relation to these theoretical principles and indicates ways in which we may expect decentralization to proceed in the Indonesian context.

Richard M. Bird

Abstract Decentralization is an increasingly fashionable theme in the development literature. This paper attempts to distil from experience in a number of countries some basic considerations that should be taken into account by would‐be decentralizers with respect to intergovernmental fiscal relations and local taxation. After a brief review of the nature of the problem and the economic case for decentralization, four basic principles of reform—transparency, stability, flexibility, and incrementalism—are put forward as useful guidelines to the restructuring of governmental finances and functions that seem needed in many developing countries.

Dennis A. Rondinelli

No abstract is available for this record.

John M. Quigley

This paper considers the relative centralization or decentralization of public finance, and relates the equity and efficiency issues ot the special features of developing economies. The paper considers the centralization of taxation and service provision in Indonesia in relation to these theoretical prinicples and indicates ways in which we may expect decentralization to proceed in the Indonesian context.

Susan A. MacManus

The 1980s were a decade of federal fiscal devolution. Federal cutbacks reflected the Reagan administration's commitment to decentralization and the realities of federal budget deficits. Cutbacks increased fiscal pressure on state and local governments, while restrictions on their borrowing capacity made it more difficult to use long-term tax-exempt debt to raise revenue in the short term. These restrictions also made it more difficult to finance public-private partnerships. To cope, state and local governments improved management techniques, transferred functions to the private sector and to other units of government, diversified their revenue systems, and looked for more discretionary revenue. Revenue enhancement was often limited by restrictive statutes, intergovernmental competition, and public opposition. Growing cynicism about the fairness of taxes prompted passage of the Tax Reform Act of 1986. This act significantly affected state and local taxing and borrowing. It did little, however, to allay state and local fears that the federal government would continue to capture more revenue for itself. As we enter the 1990s, the major question will undoubtedly be, Which governments can or should pay for what?

Robert H. Aten

Two aspects of Western public finance, the economic theory of federalism and public choice theory, have insights that, if adopted in the Soviet Union, could help improve its resource allocation to permit economic growth, mitigate the problems it has with its minorities, and aid the transition away from a centralized, Communist-Party-dominated State and society. The economic reforms proposed by Chairman Mikhail Gorbachev are briefly summarized and criticized in the context of a summary discussion of governmental decisionmaking in the Soviet Union. Lessons are identified from the U.S. historical experience that suggest certain steps to improve local government as necessary preconditions for improving Soviet economic efficiency. These are free local elections, a free local press, an independent judiciary with real authority to protect the integrity of the press and local elections, real decentralization of political power to the regions, steps toward equalization of fiscal capacity among the regions, increased citizen mobility, and adoption of actions to provide incentives for Western investment in local government capital formation. This last precondition requires a convertible currency. (To achieve a convertable currency may require other economic and political changes that are beyond the scope of this paper.) Aspects of the paper rely on information publically available through mid-1989.

Robert P. Inman

No abstract is available for this record.

Robert P. Inman

No abstract is available for this record.

Gian Carlo Guarda

This paper discusses urban services finance in the Latin American context of rapid urbanization, severe fiscal constraints and democratization of administrative systems. Analyzing the situation in thirteen different countries, it draws several conclusions which may be helpful in the design of new lending operations. The report's main theme is that the World Bank's approach to the urban sector needs to be re-directed. The structure of the report is as follows: first it reviews the rising demand for urban services, noting the positive correlations of rapid urban growth with national development, but also the corresponding, incremental fiscal pressures. The macro-economic constraints to urban expenditures are summarized and the adverse circumstances limiting new capital formation and service provision in Latin American cities is mentioned. The report also discusses whether Latin American governments are truly decentralizing and reviews the strategies to relieve the fiscal gap of subnational governments, including changes in the existing systems of revenue sharing, reassignment of public service functions, pricing adjustments, deregulation or privatization of certain services, technical assistance, and restructuring of institutional credit. The main findings and recommendations are organized according to three main groups: country concerns; theoretical concerns; and operational concerns. The text is accompanied by three case studies in Argentina, Brazil and Mexico.

Donald R. Winkler

Evaluating decentralization in terms of three economic criteria - social efficiency, technical efficiency, and equity - the paper argues that some decisionmaking (about finance and teacher recruitment) should be provided for at the local level, and some (about school organization and curriculum) at the regional level. A system of central government grants should be used to correct problems of equity and inefficiency inherent in a decentralized system. Little is known about the economic and educational consequences of decentralization, despite a wide variety of country experiences. The effects of decentralization are difficult to isolate, so scholars have focused instead on issues of implementation.

David A. Starrett

To this point, our conception of the mixed economy has treated the public sector as monolithic. However, we observe a considerable degree of government decentralization in practice, and indeed, we would expect to find some such structures in a second-best organizational design for much the same reasons we argued for market decentralization of private goods earlier. Here, we will develop a model of government structure that is roughly consistent with the actual organization of the U.S. public sector. We will emphasize normative properties of this structure, drawing on earlier discussions of political decentralization and mechanism design. One possible approach to public-sector design would be to mimic closely the structure of market decentralization. That is, we could divide up responsibilities into a large collection of fully autonomous agencies, each of which would be responsible for the allocation of a narrow range of collective goods. Autonomy would be achieved by having each individual agency elicit information on preferences and assess separate taxes and/or user charges. To the extent that “true” information is learned, it can be used to organize finance according to the so-called benefits principle – household payments for the collective goods and services would be directly related to benefits received. This mode of organization has many desirable features. First and foremost, it eliminates entirely the need for centralized information gathering and the associated cost of bureaucracy needed to administer and coordinate activities. Further, to the extent that the finance tax can be made a charge for services rendered, it will act like a price that will induce the relevant clientele to reveal their preferences.