This paper analyzes one method governments employ to circumvent the discipline of a competitive system of fiscal federalism - intergovernmental collusion in the form of intergovernmental grants. Grants, it is argued, serve to encourage the expansion of the public sector by concentrating taxing powers in the hands of the central government and by weakening the fiscal discipline imposed on governments forced to self-finance their expenditures. The results reported suggest that intergovernmental grants do encourage growth in the public sector. The results offer further support for the use of monopoly government assumptions in public sector modeling.
ABSTRACT For a nation composed of independent regions, the effects of local tax competition for business investments are examined. It is first shown that atomistic regional authorities tax only local resources to finance the provision of public services to business. Thus, an efficient interregional equilibrium is induced. Various political/institutional constraints are shown to cause misallocation of the capital stock and an inefficient provision of public services. The characterization of the inefficiency is shown to vary widely, depending upon the constraint under consideration.
In a decentralized fiscal system, it has been suggested that socio-economic characteristics have a more profound impact upon the fiscal system than do the political variables. However, in a centralized fiscal system, local government finance is constrained not only by limited local autonomy by the central government but also must respond to local demand influences on fiscal behavior. It is of interest to assess the responsiveness of the local government fiscal behavior to local socio-economic characteristics. The variation in the municipal fiscal system are analyzed using data from municipalities in Thailand during 1979-1982 as a case study. The reason for using municipalities as the case study is because of their relatively greater degree of autonomy over their fiscal systems. This study divided the municipalities into three types, namely, Nakorn, Muang, and Tambon, according to the central government classification. The purpose of this study is to explore the relationship between municipal fiscal systems and differences in local socio-economic conditions. The municipal fiscal study here includes both revenue and expenditures. On the revenue side, the study analyzes the variation of municipal revenue from both tax and non-tax revenues. On the other hand, the municipal expenditure included in this study are services required by the central government, i.e., primary education, public administration, public works, public health services, public safety, sanitation, central and specific funds. The variation of each revenue and expenditure is studied in terms of its relationship to income, relative size of the municipal population, and population density. Because of data limitations neither a behavioral function nor a budget constraint could be specified to obtain a formal demand equation. Therefore, the results of the statistical estimation of the model employed can only be interpreted as a measure of the systematic variations in municipal fiscal systems, not the determinants of the levels of these revenues and expenditures. The results show that while there exist differences in the level of revenue and expenditure in each type of municipality, the socio-economic variables are generally not significant in explaining the variation of revenues and expenditures. The political factors have a considerably larger effect on the variation of municipal fiscal systems. One of these factors is the previous year revenue and expenditure level.
This paper focuses on the impacts of oil revenues on government fiscal policy when we have externality of human capital in economic. Therefore, we devised a fiscal policy capable to make the decentralized economy to achieve the first-best equilibrium in the Uzawa-Lucas model. The results of this paper show that optimal policy requires making use of a subsidy to investment in human and physical capital. Human capital can be financed by oil revenues and tax on labor income and physical capital can be financed by oil revenues. Government size dependent to oil revenues: When share of oil revenue in GDP or ratio of oil revenue in physical capital increase, government size increases and conversely. The results show the return on the physical capital must be free of taxes, but tax on labor income needed to balance the government budget in the steady state or in the transitional phase.
ABSTRACT Nearly every OECD country has faced a scissors crisis in public finance since the worldwide depression of the mid-1970s; in slow growth economies public spending has been rising faster than tax revenues. In response, a great variety of methods have been employed to control public spending. Governments have sought to: impose global ceilings on spending; modify indexation rules; decentralize decremental decisions among government agencies; improve cash flow management; devise balanced packages; introduce new constitutional rules; provide incentives for retrenchment; and privatize public sector activities. Efforts to impose cuts in spending have been directed at the bureaucracy; transfer payments; subsidies; local and regional government; and quangos. The conclusion emphasizes that retrenchment policy presupposes a shift in the balance of power between guardians and spenders.
When the Reagan Administration took office in 1981, it concentrated its domestic efforts upon national government spending, deficits, and inflation. Its major proposed remedies have consisted of "supply-side" economics, cuts in the rates of federal spending on non-military programs and a return to greater state/local responsibility for public policy initiatives and financing. It is with this last aspect of the Reagan proposals that the present work is concerned: the impact and policy implications of federal decentralization on Arkansas. The option of a state tax increase is explored as Arkansas' response.
Some important aspects of the current French decentralization are enlightened by the recent changes in US public finance. Proceeding from very different premises, the « New Federalism » and the French decentralization share in common a context of general economic slowdown and fiscal tightness. The problems that arise and their solutions are therefore often similar, in spite of conspicuous differences in the institutional frameworks. Such similarities are in broad agreement with the economic theory of decentralized governments. The case-study of the US local public finance clearly reveals the effects of the recession. After several decades of continuing growth in local budgets, the 1981-1982 recession, closely following the « Tax Revolt » movement, caused a reversal in these trends. Both the increase in needs and the decline in revenues have been aggravated by the transfer of competences and finan- cial responsabilities from the federal government to the states. An increase in state and local taxes could not be avoided. And, in so far as some existing public services are given a high priority, other outlays had to be reduced : thus public employment shrank and public investment sharply declined.
A bstract . The fiscal crisis of particular central cities has been primarily caused by social and economic decentralization within metropolitan regions. This hypothesis is examined through a case study of the Bridgeport, Connecticut metropolitan region. Middle and upper income groups have moved from the central city of Bridgeport to its suburbs while the poor remain. Business and industry have also decentralized. These factors weaken the capacity of the central city to generate sufficient revenue from its declining share of the region's taxable resources. The central city must fund a wide range of services and faces, as all local governments do, increased costs. Because of these fundamental social and economic changes , the central city cannot meet its service commitments. Unless the existing system of public finance is altered, continued decline is inevitable.
This article constructs a decentralized growth model with two production sectors, one having competitive firms and the other oligopolists. Since capitalized pure profits for the latter sector constitute an asset which household savings must finance, we show that imperfect competition can reduce steady-state national output through both a "static effect" on allocative efficiency and a "dynamic effect" on aggregative capital accumulation. After presenting a theoretical analysis, we generate several numerical examples. The latter suggest that the "dynamic effect" of monopoly may be significantly larger than the "static effect" in practice.
In 1971 the California Supreme Court opened the door to a major reform movement to restructure the present system of decentralized school finance. With the exception of Hawaii, elementary and secondary education in the United States is supported primarily by local property taxation supplemented in part by state funded grants-in-aid. The California Supreme Court, in the now famous Serrano rulings, declared the California system in violation of the state constitution's equal protection clause. Similar rulings have also been handed down by the New Jersey Supreme Court (Robinson vs. Cahill) and the Superior Court of Hartford, Connecticut (Horton vs. Meskill). In addition, ten states have recently enacted major reform bills, and legislation is under consideration in several others. The pressure for reform is strong and continuing. As a review of the recent reform proposals indicates, the legislative search for new means of financing local schools is not simply an incremental tinkering with existing laws.' Major changes, often court required, are at issue. Long-run outcomes are uncertain; each proposal has new winners and new losers. When planning a major reform of local school finance, therefore, past experience from incremental policymaking may not be an adequate guide to choice. Long-run general equilibrium predictive models and a clearly specified evaluation rule will be needed. It is the purpose of this paper to develop such a policy framework and to apply the analysis to one region currently in the midst of school reform, the New York metropolitan area. Six alternative reform proposals are considered: foundation aid, two district power equalization plans, property tax credits, expanded Title I assistance under the Elementary and Secondary Education Act, and centralized financing and spending controls. Preferred reforms are selected under utilitarian (promiddle class), Rawlsian (pro-poor), and equal school spending (Serrano) criteria.
Formalization of personnel procedures in 229 city, country, and state finance agencies is a function of era of origin and subsequent effects of the environment. Whereas origins and the environment account for the extent of formal personnel procedures, formalization in turn gives rise to multitier hierarchies and hierarchy to decentralized decision making. The effects of origins are due to greater openness to environmental pressures at the time of formation than later on.
Many policies use two categories of instruments: a financial incentive (most often a tax) for polluters, and direct undertakings or financing of some restorations or maintenances or improvements of environmental qualities. The financial consequences of such policies, when optimum, are important for considerations of public finance, decentralization (financial autonomy), and equity (must polluters pay?). They turn out essentially to depend upon the mathematical structure of, first, the environment function, i.e., the way in which qualities depend upon both deteriorating and improving activities, and, second, the various constraints of the problem. Constraints which can be expressed by functions homogeneous of any degree are shown to have no direct financial effect. Apart from the constraints' effects, budgetary equilibrium, surplus or deficit are respectively given by functions which present constant, decreasing, or increasing qualitative returns to scale, i.e., weighted homogeneity of degree zero, positive or negative. The opposite polar cases of cleaning and dilution types of improvement technology are presented, with some other mixed simple cases and a few examples of application of the results.
A series of recent judicial decisions has focused public attention on the issue of local choice in the provision of public education. In Serrano vs. Priest, Rodriguez vs. San Antonio (1971), and similar cases in other states, the lower courts confirmed that education is a responsibility of the state government and held that local expenditures on education may not be a function of the taxable wealth of the local community.1 Although the United States Supreme Court has overturned these decisions in the appeal of Rodriguez vs. San Antonio (1973), the pressure to change the current system remains strong. The Supreme Court majority indicated that its decision reflected the limits of the federal constitutional authority and was not an approval of the status quo in educational finance. Litigation is now likely to shift to challenging the current methods as unconstitutional under state constitutions which, unlike the federal constitution, do deal specifically with education.2 Moreover, fundamental changes in the financing of local education may not require further pressure from the courts; state legislatures may seek to neutralize the effects of local wealth differences even if the current systems are not held to be unconstitutional. These judicial decisions and the ensuing legislative proposals run counter to the general economic view of local government finance. The basic presumption of economic analysis is that, because local governments can select different levels of service and because individuals can choose their area of residence, decentralized finance by local governments allows the provision of public services to reflect the variety of individual preferences for public services.3 Although the level of local spending may be nonoptimal because of intercommunity externalities and because of the method of local budget determination, fiscal decentralization still remains the only alternative to the insuperable problem of determining the optimal level of expenditure on a public service provided by a central government. In effect, autonomous decentralized financing of education provides a quasi market in which households can exercise their diverse preferences by their location decisions. This paper considers the problem of * Professor of economics, Harvard University. I am grateful to Charles Clotfelter for assistance with the statistical analysis, to Stephen Weiss for providing unpublished data on school expenditures, and to the Ford Foundation and National Science Foundation for financial support. I have benefited from discussions of an earlier version in seminars at Harvard, M.I.T., and Berkeley, and from comments by Noel Edelson, Eric Toder, and David Stern. An earlier and more complete discussion of this study was distributed as Harvard Institute of Economic Research paper no. 293, May 1973 (revised July 1973). 1 In Serrano vs. Priest, the landmark case in this area, the plaintiff and the courts were very much influenced by the line of argument and suggested remedies develope(l in John Coons et al. For a further discussion of the legal precedents, see Arthur Wise. 2 Almost immediately after the United States Supreme Court decision in Rodriguez vs. San Antonio, the New Jersey Supreme Court held that the current system of local finance violated the New Jersey state constitution. See Wise for a summary of the provisions of other state constitutions. I Charles Tiebout presented a formal analysis of the full efficiency of local government provision of public services under quite special conditions. See Wallace Oates and James Buchanan and Charles Goetz for a further discussion of these issues.
This paper addresses the question of whether, in the context of decentralization among levels of government, an output or performance subsidy is demonstrably superior to a cost subsidy as a tool for influencing the behavior of a local unit. Grants-in-aid for example are cost subsidies; are they therefore inherently inferior incentive devices? The answer suggested to this question is that a performance subsidy may be superior to, equal to, or inferior to a cost subsidy depending upon three factors: (1) the technology of local production, (2) the optimizing behavior of local officials, (3) the equity objectives of federal government.
Analysis of the pure theory of public expenditures reveals a pathological case of market failure. That is, goods with the “double polar” characteristics of joint supply and the impossibility of exclusion are such that their production will occur only under public organization (collective supply). Yet, in itself, the pure theory of public finance constitutes neither an economic rationale for the state nor an adequate economic theory of government expenditure. An economic theory of the state, consistent with the traditions of individualistic economics, may be developed around the assumption that the state aims to maximize societal economic welfare defined in terms of conformance with individual preferences. 1 If market-determined prices are presumed to be the primary way in which preferences are manifest, such a theory requires a thoroughgoing description of all sources of failure of decentralized markets coupled with an analysis of the potentialities of various government policies to deal with these failures. The analogous economic theory of public expenditure must elucidate the specific role of government budgetary outlays as one among various state actions intended to deal with market failure. Further, it must distinguish public expenditures whose purpose is to subsidize households and private market organizations from those government expenditures for goods and services which then are either provided through collective organization and supply or are sold by the state. These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.
Public school finance in the United States is highly decentralized and can be described as the sum of separately determined school finance programs established by each state. Since funds to support educational expenditures in a school district come from various sources, primarily state and local, it is necessary for states to derive schemes by which these resources can be combined to finance education at the local level. The administration and derivation of these resource allocation schemes is usually carried out at the state level.
For a self-financing business enterprise (or for an underdeveloped economy subject to constraints on the availability of foreign investment funds), three theorems are presented. Each result is based upon the assumption that the firm's investment opportunities follow constant returns-to-scale, and are of the “point input—stream output” type. Theorem 1 shows that if the enterprise is attempting to maximize a linear function of the cash dividends paid out, the optimization model cannot explain a readily observed phenomenon: both investment expenditures and also cash dividends at the same point in time. Theorems 2 and 3 explore the consequences of supposing that the maximand is a concave, nonlinear function of the cash dividends paid out, and that the optimal solution consists of positive investment expenditures over time. (The optimal policy may or may not call for positive dividends during each time period.) Then Theorem 2 shows that the optimal dual variable price ratios are determined uniquely by the set of investment opportunities available, and Theorem 3 shows that the optimal policy can be evaluated numerically through optimization of the original utility function subject to a specially constructed single linear equality constraint on the cash withdrawals. An economic decentralization interpretation is attached to this auxiliary maximization problem.
TN ORDER to achieve the benefits of decentralization in decision-making, many corporations have developed divisional organizations in which some or all of the separate divisions are virtually autonomous centers. This paper is concerned with the problem of pricing the goods and services that are exchanged between such divisions within a firm and with how these prices should be set in order to induce each division to act so as to maximize the profit of the firm as a whole. The problem is an important one, because the prices which are set on internal transfers affect the level of activity within divisions, the rate of return on investment by which each division is judged, and the total profit -that is achieved by.the firm as a whole. Two recent papers which have drawn attention to the crucial importance of transfer-price policies have also discussed alternative approaches to the problem.' The paper by Cook recommends the use of market-based prices, at least as an ideal, while Dean favors negotiated competitive prices. Such brief description does not, of course, do justice to either of the articles, both of which were more concerned with drawing attention to the importance of decentralization and transfer pricing than with rigorous determination of optimal transfer-price rules. The argument made in the present paper is that market price is the correct transfer price only where the commodity being transferred is produced in a competitive market, that is, competitive in the theoretical sense that no single producer considers himself large enough to influence price by his own output decision. If the market is imperfectly competitive, or where no market for the transferred commodity exists, the correct procedure is to transfer at marginal cost (given certain simplifying conditions) or at some price between marginal cost and market price in the most general case.2