Decentralization and electoral accountability: Incentives, separation and voter welfare

This paper provides a systematic analysis of fiscal decentralization on the quality of government by studying jointly its effects on electoral discipline and selection, in a setting where, realistically, voters only have limited information about fiscal policy in other jurisdictions, ruling out yardstick competition. Fiscal centralization reduces the extent of electoral discipline, as a corrupt (rent-seeking) incumbent can target good behavior only at a “minimum winning coalition” of regions (selective rent-diversion) in order to retain office, but thus makes it more profitable for bad incumbents to pool with good ones, thus increasing the probability of electoral discipline occurring at all. Voters tend to prefer centralization when politicians are low quality i.e. more likely to be corruptible. Centralization with uniform taxes can dominate both unconstrained centralization and decentralization, explaining why uniform taxes are so widely observed.     

Public budget composition,fiscal (de)centralization,and welfare

Abstract We study the optimal degree of fiscal decentralization in a dynamic federal economy where governments decide on budget size and its allocation between public education and infrastructure spending. We find that full centralization of tax and expenditure policies is optimal when infrastructure productivity is similar across regions. When differences are not too large, partial centralization is optimal. With strong differences, full decentralization becomes optimal. National steady‐state output tends to be highest under full decentralization. We provide a justification for the mixed evidence regarding the Oates conjecture by showing that full dominates partial decentralization, despite being inferior to complete decentralization.     

Human Fallibility, Complementarity, and Fiscal Decentralization

This paper examines economic growth properties under alternative fiscal organizations when a bureau's decisions are fallible. A country consists of J jurisdictions, which need a public service. In a centralized government, one authority decides on services in every jurisdiction. In a decentralized government, J authorities are in charge of each public service. An authority can have high ability or low ability, and an authority with high ability draws a good project with higher probability. We first show that the decentralized government provides the same average quality of public services, with lower variance, than does the centralized government. We then apply this result to an economic growth model where the value of the Solow residual is a constant elasticity of substitution (CES) function of public services. We show that there is a critical value of the degree of complementarity below which fiscal decentralization is more desirable than fiscal centralization for an expected economic growth, and the decentralized government has a lower variance of GDP growth.     

Distributive Politics and the Costs of Centralization

This paper studies the choice between centralization and decentralization of fiscal policy in a political economy setting. With centralization, regional delegates vote over agendas comprising sets of region–specific projects. The outcome is inefficient because the choice of projects is insufficiently sensitive to within–region benefits. The number of projects funded may be non–monotonic in the strength of project externalities. The efficiency gains from decentralization, and the performance of "constitutional rules" (such as majority voting) which may be used to choose between decentralization and centralization, are then discussed in this framework. Weaker externalities and more heterogeneity between regions need not increase the efficiency gain from decentralization.     

VOTING,LOBBYING, AND THE DECENTRALIZATION THEOREM

This paper revisits the well‐known fiscal “Decentralization Theorem” by relaxing the role of the assumption that governments are benevolent, while retaining the assumption of policy uniformity. If, instead, decisions are made by majority voting, the theorem fails. Specifically, (i) centralization can welfare‐dominate decentralization even if there are no externalities and regions are heterogeneous and (ii) decentralization can welfare‐dominate centralization even if there are positive externalities and regions are homogeneous. Similar results are obtained if a benevolent government is subject to lobbying. Hence, the Decentralization Theorem is not robust to relatively minor deviations away from the benchmark of a purely benevolent government.     

Pension reserve fund,political budget cycles and fiscal illusion

We model political manipulations of pension reserve funds in a modified Shi and Svensson (2006) political budget cycle (PBC) model. Assuming that a share of voters suffers from fiscal illusion the incumbent can increase her re-election chances by prematurely spending parts of the reserve fund. We also obtain results that are counterintuitive, but only at first sight. First, it can be shown that the incumbent wants to reduce the manipulation when her ego rent increases. Second, the optimal magnitude of manipulation does not necessarily go up when the share of voters suffering from fiscal illusion rises.     

PARTY CUES,POLITICAL TRENDS,AND FISCAL INTERACTIONS IN THE UNITED STATES

Recent theoretical and empirical research has suggested that similarities in party affiliations across space will alter voters' comparisons, thus influencing fiscal policy mimicking. We employ a two‐regime spatial panel data model applied to U.S. state governors from 1970 to 2012, and find rather weak empirical evidence of influence of political party affiliations in fiscal yardstick competition. Our observed cross‐state interdependence in fiscal policies suggests voters may not weigh party affiliation heavily in their measure of comparative quality, treating each incumbent individually and independently. Incumbents strategically choose policy accordingly. This provides indirect support for the median voter theorem, in which incumbents' objective function is to maximize votes, independent of political affiliation. (JEL D72, H2, H7)     

Economic integration and fiscal devolution

In this paper we investigate how economic integration influences the political decision of integration and separation of jurisdictions. In a model with (imperfect) capital mobility, we consider that, not only the redistributive policy itself, but also the level of policy centralization is decided by a majority vote. We find that the net benefit from integration is not monotonic with the level of world capital market integration and present a case where integration of two regions occurs only for intermediate levels of mobility. This conclusion relies on the comparison of the regional majorities’ utility under the various regimes. The benefits from integration arise from the elimination of tax competition across jurisdictions, which allows for more income redistribution, whereas the costs are linked to the diversity of preferences across regions, namely that of the decisive voters. We also show that a federal regime is better than complete centralization in keeping a nation united.     

最优财政分权度与我国经济增长的关系研究

过度集权或者过度分权都不利于经济增长,因此理论上可能存在一个最优财政分权度,并与最优经济增长水平相适应.本文对我国1985年至2000年财政分权对经济增长的影响进行了非线性关系检验,结果表明我国的最优财政分权度为66.67%.同时指出,我国的财政分权并不是面临一个是否应进一步分权或集权的问题,而是应该朝着制度完备的分权方向发展,使得财政分权通过制度的规范化、科学化、透明化、公正化而发挥其积极作用.     

Fiscal Federalism and Electoral Accountability

We evaluate how governance uncertainty—exemplified by turnout uncertainty—affects the trade‐off between internalization of externalities and political accountability in the design of the fiscal state. We show that centralization only weakens political accountability in the presence of negative externalities. Unlike positive externalities, negative externalities allow federal politicians to extract higher rents. This yields two new insights. First, decentralization can only Pareto dominate centralization in economies with negative externalities. Second, centralization may not be Pareto efficient in economies with positive externalities despite the fact that policy can be tailored to regional taste differences and centralization internalizes the positive externality.     

集权与分权的抉择—改革开放30年中国财政体制的变迁

中国财政体制的演变反映出财政分权程度不仅没有提高,反而出现了财政集权的趋势;当前中央和地方间的事权错位,财权上移,事权下放,导致基层政府的支出责任过大;不当的事权和财权的划分造成了我国财政纵向不平衡较高,地方政府对中央政府的依赖度较高,但税收控制度低;财政分权对政府规模、经济增长和收入分配等有着不确定的影响;未来的改革还需要在进一步权衡分权和集权优劣的基础上作出选择,适当的分权是大势所趋。     

Decentralization and the shadow economy: Oates meets Allingham–Sandmo

This article studies the impact of decentralization on the shadow economy. We argue that decentralization may decrease the size of the shadow economy mainly through two transmission channels: (1) decentralization enhancing public sector efficiency (efficiency effect), and (2) decentralization reducing the distance between bureaucrats and economic agents, which increases the probability of detection of shadow economic activities (deterrence effect). Using various measures of fiscal, political and government employment decentralization in a cross-section of countries, we find the deterrence effect to be of more importance. The deterrence effect is stronger, the lower the degree of institutional quality. We find no robust evidence of the efficiency effect.     

财政收入集权增加了基层政府公共服务支出吗?以河南省减免农业税为例

很多研究表明,中国式分权导致了地方政府财政支出结构偏重基础设施建设,忽视公共服务和人力资本投入。免征农业税和相应的转移支付降低了基层政府的财政独立性,其影响与上述政策结果相似。利用河南省108个县级单位2001—2008年的面板数据,本文对减免农业税后的财政支出进行了实证检验,发现受到免征农业税影响较大的县农业支出显著增加,对教育的投入显著下降。由于前者主要是由新农村建设等政策压力造成的,这说明财政收入集权强化了那些易于考核的政策目标的执行力度。     

Optimal fiscal decentralization: Redistribution and welfare implications

The literature has been inconclusive regarding the welfare effects of fiscal decentralization (FD), defined here as the extent to which local governments collect and spend local tax revenues. We present an original model to investigate formally the distributional and welfare implications of FD. In contrast to the standard approach that compares the implications of full FD with that of centralization, we consider that the central government chooses the level of FD to maximize welfare in a heterogeneous country. Noncooperatively, local governments choose their tax collection effort to maximize local utility. We show that an increase in the tax rate leads optimal FD to increase so as to compensate for the welfare loss from decreasing optimal local tax effort. Hence, welfare and income distribution improve in FD at its intermediate, rather than extreme, levels. We coin this result as the decentralization-Laffer curve. As regional spillovers increase, FD is less desirable as it deteriorates welfare and income distribution. This finding provides a novel support for the decentralization theorem and contributes to the fiscal policy debate.     

Does Tax Competition Reduce Corruption?

A vast literature asserts that competition among jurisdictions can mitigate corruption. However, empirical studies do not fully support such a conventional view. This paper points out a drawback of the conventional view, that is, it ignores the role played by the owners of immobile factors. Within a standard tax competition model, we amend the conventional view by incorporating the lobbying of the immobile factor owners, and show that fiscal decentralization can aggravate corruption. We also demonstrate that social welfare can be higher under decentralization than under centralization in some cases, whereas the immobile factor owners' lobbying will prevent such a superiority of decentralization from being the outcome. Moreover, we provide an example to show that a better policy outcome and a higher level of corruption can co‐exist, which contrasts with the general belief.     

FISCAL DECENTRALIZATION AND ECONOMIC GROWTH OF VIETNAMESE PROVINCES: THE ROLE OF LOCAL PUBLIC GOVERNANCE

This study offers an insight into the public governance role in the relationship between fiscal decentralization and provincial economic growth in Vietnam. Fiscal decentralization measures are assorted. Applying a sequential (two‐stage) estimation for the panel data of 62 provinces of Vietnam over the 2006–2015 period, we find that first, fiscal decentralization is positively related to the economic growth of Vietnamese provinces. Second, the effects of public governance on economic growth vary across provinces depending on various levels of local public governance. Interestingly, the effect of fiscal decentralization is strengthened when this variable is added along with better quality of public governance. In a region of high public governance quality, fiscal decentralization exerts a positive effect on its economic growth. Our findings imply that the design of fiscal decentralization needs to be associated with local governments’ ability of public governance to improve the local economic growth.     

The dual nature of public goods and congestion: the role of fiscal policy revisited

Abstract The role of fiscal policy is examined when public goods provide both productive and utility services. In the presence of congestion, the consumption tax is shown to be distortionary. Optimal fiscal policy involves using consumption‐based instruments in conjunction with the income tax. An income tax‐financed increase in government spending dominates both lump‐sum and consumption tax‐financing. Replacing the lump‐sum tax with an income tax to finance a given level of spending dominates introducing an equivalent consumption tax. These results contrast sharply with the literature, where the consumption tax is generally viewed as the least distortionary source of public finance.     

Uniformity Requirement and Political Accountability

This paper discusses the fundamental hypothesis of policy uniformity under centralized decision making, which underlies Oates' famous decentralization theorem. The theorem has, in more recent times, come under pressure owing to the prediction that local public goods are provided to minimum winning coalitions rather than uniformly. The focus of this paper is on the impact of uniformity rules on political accountability. Using the concept of minimum winning coalitions, it is shown that the power of voters over politicians vanishes if election districts receive different levels of local public goods. However, the setting up of sufficiently strong uniformity rules means that voters regain power. According to Oates' theorem, uniformity is the main disadvantage of centralization but, according to the analysis undertaken in this paper, centralization without uniformity would be even worse.     

The tradeoff between growth and equity in decentralization policy: China's experience

This paper investigates the potential tradeoff between economic growth and regional equity in the design of fiscal decentralization policy in the context of China's experience. We develop a theoretical model of fiscal decentralization, where overall national economic growth and equity in the regional distribution of fiscal resources are the two objectives pursued by the central government. The model is tested using panel data for 1985–98. We find that fiscal decentralization in China has led to economic growth as well as to significant increases in regional inequality.     

Government size,decentralization and growth: empirical evidence from Italian regions

The aim of this study is to empirically assess the relationship among government size, decentralization and economic growth in Italian ordinary regions. The empirical analysis, based on a panel dataset on Italian regions, provides evidence in support of the existence of an inverted U-shaped relationship between public expenditure and economic growth, that depends on the degree of fiscal decentralization. In particular, according to our estimates on the specific Italian case, the optimal degree of decentralization is around 32%, while the optimal government size value is approximately 52%.