CAPITALIZATION AND THE THEORY OF LOCAL PUBLIC FINANCE: AN INTERPRETIVE ESSAY

Abstract. The Tiebout hypothesis that consumer mobility and interjurisdictional competition leads to efficient provision of local services has provoked much controversy and debate in recent years. This article summarizes the opposing and conflicting viewpoints on this subject and presents a synthesis of the theoretical and empirical literature. The basic conclusion of this literature is that only under very restrictive assumptions will foot-voting and interjurisdictional competition ensure allocative efficiency in the local public sector. Nevertheless, the Tiebout mechanism offers important insights for public policy debates on the assignment of taxes and services and the design of equalization grants. Oates' suggestion that capitalization of fiscal differentials into residential property values provides an empirical test of the Tiebout hypothesis also generated an intense debate on the theoretical validity of this procedure and a heightened interest in its empirical applications. This debate is evaluated and an overview is given of the leading empirical approaches to test the efficiency and equity implications of the Tiebout mechanism. Controversial empirical issues such as the choice of the tax price term, the level of aggregation and econometric estimation problems are highlighted in this part of the survey.     

Residential choice and the local public sector: An alternative test of the “Tiebout Hypothesis”

This paper provides an empirical test of the hypothesis, commonly referred to as the “Tiebout Hypothesis,” that locally provided public services and the level of local taxes influences residential choice decisions of households. This hypothesis has previously been tested by looking at the capitalization of fiscal factors into housing prices. This study analyzes the determinants of residential choice by looking at household moving data. The results provide support for the Tiebout hypothesis, even in cases when no capitalization is expected. Support was developed for the hypothesis that at any point of time significant fiscal disequilibrium exists for residents of some communities, resulting in a reduction of the efficiency properties of the Tiebout mechanism.     

A centralized directional distance model for efficient and horizontally equitable grants allocation to local governments

This paper proposes a directional distance model for efficient resource allocation when there is a centralized decision maker who oversees all units. The model is designed to allocate grants from an upper-tier government to the municipalities under its jurisdiction. Local governments employ the grants together with levied local taxes to provide services to their citizens. The objective of our formulation is to optimize grants allocation across municipalities taking into account efficiency, effectiveness and horizontal fiscal equity criteria. The model easily allows the setting of alternative priorities of the central decision maker, thus permitting quantification of the trade-off between the potential increase in the provision of local services and its associated cost. The model is applied to the allocation of current grants in the autonomous community of Navarre in northern Spain.     

THE ECONOMICS OF FISCAL DECENTRALIZATION

Abstract There is no complete overview or discussion of the literature of the economics of federalism and fiscal decentralization, even though scholarly interest in the topic has been increasing significantly over recent years. This paper provides a general, brief but comprehensive overview of the main insights from the literature on fiscal federalism and decentralization. In doing so, literature on fiscal federalism and decentralization is grouped into two main approaches: ‘first generation approach’ and ‘an emerging second generation approach’. The discussion generally covers the two notions of fiscal decentralization: ‘fiscal autonomy’ and ‘fiscal importance’ of subnational governments as the background of the most recently developed index of fiscal decentralization in Vo. The relevance of this discussion to any further development of a fiscal decentralization index is briefly noted.     

The effect of property taxes on vacation home growth rates: Evidence from Michigan

The Tiebout model assumes that individuals sort to the jurisdiction which best matches their fiscal preferences. However, there is a paucity of reliable estimates for the impact of tax changes on household mobility. We utilize a state mandated school finance reform and temporal differences in vacation home densities to provide a unique test of this fundamental Tiebout assumption. The results show that changes in property taxes explain a significant amount of the variation in vacation home growth; a 3–4 mil decrease in property tax rates is associated with an increase of approximately one vacation home per square kilometer.     

THE IMPACT OF FISCAL DECENTRALIZATION: A SURVEY

In this paper, we offer a comprehensive and updated review of the impact of fiscal decentralization on the economy, society and politics. Our first target is the examination of two crucial and yet unsolved issues in the empirical literature on decentralization: the proper measurement of decentralization itself and its potential endogeneity in econometric estimates. Then, we discuss the main existing findings on the effects of decentralization on a relevant list of socio-economic issues. The impact of fiscal decentralization reforms on political institutions and public policies is also considered. Complete answers on the impact of fiscal decentralization are not likely to be certain but, overall, there are reasons to be optimistic about the net positive result. Our survey by necessity has to be selective but it presents a balanced view of what is known and what is not yet known opening room for further research and practice on fiscal decentralization.     

中国城市扩张的财政激励——基于1998～2009年我国省级面板数据的实证分析

基于我国1998～2009年的省级面板数据,运用广义矩估计法(GMM),实证分析了财政分权、转移支付与当前地方政府城市扩张之间的关系。研究表明:"中国式"的财政分权体制是造成城市快速扩张的重要原因,而现有的财政转移支付并不能有效逆转这种趋势,改革现有的财政体制与政府治理体制才是解决问题的根本之道。研究还表明,我国的财政分权与转移支付效应存在明显的地区差异和跨时差异。同时,财政分权与转移支付对城市扩张存在着相互影响,转移支付的增加会降低财政分权的效应,财政分权度的提高也会减缓转移支付的作用。     

A NEW DIRECTION IN WORLD BANK URBAN LENDING TO LATIN AMERICAN COUNTRIES*

The urban development loans of the World Bank are acquiring a regional rather than a city-specific orientation in several countries, especially in Latin America. These broader operations often dovetail national trends of decentralization in the political, administrative and fiscal structures. Given the current constraints of the central governments in meeting the growing demands of urbanization through incremental top-down grants, these operations aim at a gradual substitution of unrequited transfers with long-term loans to regional and local governments. The paper reviews the implications of this approach in terms of distribution and efficiency and suggests that it may be more suitable in countries undergoing economic adjustment. The objective is to sustain motivation in fiscal effort and resource mobilization at the city level, and possibly establish a different rationale for external credit supporting local infrastructure and service improvements.     

Fiscal decentralization and public sector efficiency: evidence from OECD countries

This paper studies the impact of fiscal decentralization on public sector efficiency (PSE). We first use a theoretical framework that illustrates the two opposing forces that shape a non-monotonic effect of fiscal decentralization on PSE. Subsequently, we carry out an empirical analysis for 21 OECD countries, between 1970 and 2000. A country-level dataset is used to measure PSE in delivering education and health services and the new indices are regressed on well-established decentralization measures. Irrespective of whether PSE concerns education or health services, an inverted U-shaped relationship has been identified between government efficiency in providing these services and fiscal decentralization. This relationship is robust across several different specifications and estimation methods.     

Fiscal decentralization and multinational firms’ ownership: evidence from China

China’s fiscal decentralization increases the incentive for local governments to maintain economic prosperity and improve institutional environments for multinational firms. This study investigates the impact of fiscal decentralization on the ownership shares of multinational firms in China. Multinational firms located in regions with higher degrees of fiscal decentralization are found to own larger shares of their foreign subsidiaries. This result is consistent under various robustness checks, including instrumental variables estimations. The finding suggests that multinational firms respond to local fiscal decentralization by increasing their participation in investment. This study therefore provides additional evidence for the beneficial effect of fiscal decentralization on China’s economic growth by highlighting the risk-mitigating role of fiscal decentralization.     

The Effects of Fiscal Decentralization on Household Income Inequality: Some Empirical Evidence

Abstract

We investigate the effects of fiscal decentralization on income inequality using a sample of 23 OECD countries over the period 1971–2000. We utilize novel and robust measures of fiscal decentralization based on different degrees of fiscal autonomy of sub-central governments. Our results highlight the importance of both the nature of fiscal decentralization—expenditure versus revenue—and the extent to which independent spending responsibility and taxing powers are actually assigned to local governments. A higher degree of tax decentralization is associated with higher household income inequality within a country. Thus, even if fiscal decentralization could be attractive according to efficiency reasons, it may actually have undesirable consequences on the income distribution.     

How economic integration affects the vertical structure of the public sector

This paper investigates the impact of economic integration on the vertical structure of the public sector within a country. To tackle this issue we set up a model of fiscal federalism, where economic integration is assumed to affect central government tax revenues. The main findings are that when an increase of the impact of economic integration brings about a reduction in central government tax revenues, under certain conditions: (a) it reduces central government expenditure; (b) it reduces general government expenditure; (c) it increases local taxation; (d) it increases the degree of public sector decentralization. Quite interestingly, these results are consistent with different patterns of local public spending and grants to local government.     

Partial fiscal decentralization and demand responsiveness of the local public sector: Theory and evidence from Norway

This paper provides an empirical test of a principal tenet of fiscal federalism: that spending discretion, when granted to localities, allows public-good levels to adjust to suit local demands. The test is based on a simple model of partial fiscal decentralization, under which earmarking of central transfers for particular uses is eliminated, allowing funds to be spent according to local tastes. The greater role of local demand determinants following partial decentralization is confirmed by the paper’s empirical results, which show the effects of the 1986 Norwegian reform.     

Decentralization and economic growth revisited: an empirical note

Although it is theoretically expected that decentralization leads to efficient provision of local public services and stimulates economic development, there is a mixed picture of the decentralization effect on economic growth across earlier empirical studies. Using the instrument variables (IV) technique with the latest cross-country data for the period from 1997 to 2001, this paper found that fiscal decentralization has a significant positive impact on per capita GDP growth. Therefore, when the focus is placed on the latest information on the economic situation in the latter 1990s, decentralization, particularly on the fiscal expenditure side, is instrumental in economic growth.     

FISCAL DECENTRALIZATION AND INTERGOVERNMENTAL RELATIONS: AN ANALYSIS OF FEDERAL VERSUS STATE EDUCATION FINANCE IN MEXICO

While decentralization is on the forefront of the reform agenda of many developing countries, few studies have performed empirical analysis to provide a holistic picture of the important fiscal, efficiency, and equity issues. Specifically, decentralization nearly always involves fiscal and administrative decisions by both national and sub-national governments, as well as intricate intergovernmental relations. Here, two empirical models are presented for the Mexican primary and secondary education sector. The first analyzes the efficiency-equity trade-off implicit the Mexican Federal Government's educational fiscal transfers to states. Unlike most similar analyses, this model analyzes the distribution of outcomes not simply expenditures. The second model analyzes the relative productivity of separate expenditures by the Federal and state governments before Mexico's recent educational decentralization legislation. The findings show that before the decentralization, the Federal Government exhibited some concern for equity, but that in doing so also treated states unequally according to criteria that have little to do with either efficiency or equity. In addition, the results show that the Federal Government may indeed have been the more efficient provider of primary and secondary education, raising concern for the fiscal and administrative relationship set up by the decentralization legislation: the Federal Government will continue to pay, while the states have gained relative autonomy over expenditures.     

金融科技能影响金融分权吗? ——来自金融科技信贷的证据

金融科技正在变革全球金融体系、鼎新世界金融格局。那么,金融科技在改变中国金融业格局的同时,是否会影响中国中央和地方之间的金融分权呢？本文在理论分析的基础上,使用2010—2018年中国31个省级区域的面板数据进行实证检验,结果表明金融科技降低了地方政府的金融分权水平。进一步讨论发现：金融科技对金融分权的抑制效应受到财政分权和城镇化率影响,财政分权越大的地区,金融科技对金融分权的抑制效应越明显;城镇化率越高的地区,金融科技对金融分权的抑制效应越小;在中国区域经济发展不平衡的现实背景下,金融科技对金融分权的抑制作用在金融发展欠发达地区比在较发达地区更强。     

财政分权有利于贫困减少吗?——来自分税制改革后的省际证据

本文从公共支出效率和公共支出结构两个角度,论述了财政分权和贫困减少之间的理论联系。一方面,财政分权通过增加亲贫式支出的配置效率来实现减贫目标;另一方面,财政分权加剧了地方政府间的竞争程度,而地区竞争会扭曲公共支出结构,阻碍减贫目标的实现。利用我国分税制改革后的省际数据发现:就北京、上海和天津而言,财政分权程度的增加恶化了贫困状况;而对于其他省份,财政分权程度的增加则有利于缓解贫困。     

外商直接投资、区域经济发展:财政分权下的研究

文章从财政分权、外商直接投资和经济发展的角度分析了中国东中西部三个区域经济发展问题,发现中国区域经济增长的不平衡性也体现在财政分权的政府效率和经济发展阶段的不平衡。认为东部经济正在结构调整,分权需要深化;中部经济需要调整,分权需要继续推进;西部则需要改变政府效率,提高财政支出水平,改善投资环境。     

Population decentralization within metropolitan areas: 1970-1980

Using a data set that maintains geographic and fiscal continuity over time and across a sample of major U.S. metropolitan areas, the authors identify factors of economic and population decentralization that affected central city areas between 1970 and 1980. The problems of annexation are resolved by estimating population changes for central cities and suburban areas with constant 1980 boundaries, and by calculating fiscal variables from overlapping jurisdictions by city area as opposed to municipal city government only. "The empirical investigation supports the view that demographic and housing stock variables seem to have had a greater impact on decentralization than central city-suburban fiscal differences."     

Complementarity,fiscal decentralization and economic growth

Theories of the voluntary provision of public goods and development economics have clarified that complementarity in the production process is a crucial ingredient to understanding how alternative economic environments affect economic performance. This paper examines how the structures of intra- and inter-regional complementarity affect the relationship between economic growth and fiscal decentralization. We provide a theory that describes how fiscal decentralization affects economic growth under various structures of regional complementarity. Our empirical analysis, based on a panel data set of the fifty states of the United States over the period of 1992–1997, supports our theoretical specification of the production function. Also, we observe a hump-shaped relationship between fiscal decentralization and economic growth that is consistent with our theoretical result. Our analysis also shows that the optimal degree of fiscal decentralization conducive to economic growth is higher than the average of the data in some cases, and hence further decentralization is recommended for economic growth. The previous version of the paper was presented at the 59th Congress of the International Institute of Public Finance (University of Economics in Prague, Prague), the 2003 Fall Meeting of the Japanese Economic Association (Meiji University, Tokyo), the 60th Annual Meeting of the Japanese Institute of Public Finance (Kansai University, Osaka), and in seminars at Yokohama National University and the University of California, Irvine. The authors acknowledge the comments and discussions by people including Timothy Goodspeed, Kiyoshi Mitsui, Motohiro Sato, Etsuro Shioji, Tsunao Okumura, and Craig Parsons. We are also grateful for the comments by the Editor (Amihai Glazer) and two anonymous referees. The usual disclaimer applies. Nishimura acknowledges the financial support from JSPS (Japan Society for the Promotion of Science) Postdoctoral Fellowships for Research Abroad.