Compensation for environmental services and intergovernmental fiscal transfers: The case of India

This paper studies mechanisms to compensate local government for the public provision of environmental services using the theory of optimal fiscal transfers in India. Especially, we analyzed the role of intergovernmental fiscal transfers in achieving the environmental goal. Simply assigning the functions at appropriate levels does not ensure optimal provision of environmental services. Optimality in resource allocation could be achieved by combining the assignment system with an appropriate compensation mechanism. Intergovernmental fiscal transfers would be a suitable mechanism for compensating the local governments and help in internalizing the spillover effects of providing environmental public goods. Illustrations are also provided for India.     

Revisiting the redistribution effects of intergovernmental fiscal transfers: evidence from Taiwan

This paper employs a panel of 23 local governments in Taiwan over 1998–2010 to re-estimate the redistribution effects of intergovernmental fiscal transfers by considering a self-financing resources of local government as the transition variable in panel smooth transition regression models. Empirical results show that the income (or tax revenues) redistribution effects of fiscal transfer policies are nonlinear and vary with time and across local governments. The grants from central government can improve income and tax revenues distribution of local governments; however, the centrally allotted tax revenues have inverse effects and the total fiscal transfers have ambiguous effects. The total fiscal transfer is a proper policy instrument for improving income redistribution, and the grants for improving tax revenues redistribution. However, high self-financing resources ratios are harmful for these redistribution effects.     

Does delegation of fiscal policy to an independent agency make a difference? Evidence from intergovernmental transfers in India

One area of fiscal policy in which several countries have delegated responsibility to an independent agency is the distribution of national resource transfers across regional and local governments. Such delegation is expected to promote equity and efficiency, and mitigate distortions created by political incentives. This paper tests whether delegation to an independent agency indeed makes a difference by contrasting the impact of partisan politics on two types of fiscal transfers to states in the Indian federation over a period of time, 1972–1995. The pattern of evidence shows that, while the transfers that are determined by the central political executive are indeed distributed to favor particular states that are politically important for the central ruling party, the transfers that are delegated to an independent agency serve to constrain such partisan impact.     

Agglomeration,migration cost and intergovernmental transfers

The purpose of this article is to investigate the central government redistribution policies across local governments that affect regional agglomeration. Though full agglomeration is efficient, in many cases factor mobility is imperfect and the full agglomeration is not realized. This article analysed whether or not the central government should adjust the distribution of populations through local governments. The result is as follows: If individuals are relatively mobile, the central government can improve the aggregate income. In this case, when the private production and public sector are small, the central government should transfer from the productive regions local government to low-productive regions.     

The case for fiscal rules

This paper estimates the effects of fiscal institutions on fiscal policy outcomes, addressing issues related to measurement and endogeneity in a novel way. Recently developed indices, based on partially ordered set theory, are used to quantify the stringency of fiscal rules. Identification of their effects is achieved by exploiting the exogeneity of institutional variables (checks and balances, government fragmentation, inflation targeting), which are found to be relevant determinants of fiscal rules. Our two-stage least squares estimates for (up to) 74 countries over the period 1985–2012 provide strong evidence that countries with more stringent fiscal rules have higher fiscal balances (lower deficits), lower interest rate spreads on government bonds, and lower output volatility.     

完善中国政府间转移支付的路径选择

作为分权化财政体制的组成部分,政府间转移支付在不同制度环境下产生的效果也存在很大差异。中国自上而下的财政分权强调更多的是发挥中央政府的宏观调控作用和保证中央政府取得足够的财政资源,因此转移支付在很大程度上被用于弥补地方财政缺口,成为中央政府实现纵向控制的重要手段。改进中国转移支付体系的策略应当是进一步完善以公式为基础的分配标准,并在政治上可行的情况下促进均等化。     

The effects of partisan alignment on the allocation of intergovernmental transfers. Differences-in-differences estimates for Spain

In this paper we test the hypothesis that municipalities aligned with upper-tier grantor governments (i.e., controlled by the same party) will receive more grants than those that are unaligned. We use a rich Spanish database, which provides information on grants received by nearly 900 municipalities during the period 1993-2003 from three different upper-tier governments (i.e., Central, Regional and Upper-local). Since three elections were held at each tier during this period, we have enough within-municipality variation in partisan alignment to provide differences-in-differences estimates of the effects of alignment on the amount of grants coming from each source. Moreover, the fact that a municipality may simultaneously receive grants from aligned and unaligned grantors allows us to use a triple-differences estimator, which consists of estimating the effects of changing alignment status on the change in grants coming from the aligned grantors relative to the change in grants coming from the unaligned ones. The results suggest that partisan alignment has a sizeable positive effect on the amount of grants received by municipalities. For example, with majority governments at the two layers, aligned municipalities receive over 40% more grants than unaligned ones.     

The incentive effect of fiscal equalization transfers on tax policy

A theoretical analysis considers the impact of a typical system of redistributive “fiscal equalization” transfers on the tax effort of local jurisdictions. More specifically, it shows that the marginal contribution rate, i.e. the rate at which an increase in the tax base reduces those transfers, might be positively associated with the local tax rate while the volume of grants received is likely to be inversely related to the tax rate. These predictions are tested in an empirical analysis of the tax policy of German municipalities. In order to identify the incentive effect the analysis exploits discontinuities in the rules of the fiscal equalization system as well as policy changes. The empirical results support the existence of an incentive effect, suggesting that the high marginal contribution rates induce the municipalities to set significantly higher business tax rates compared with a situation without fiscal equalization.     

How much to share: Welfare effects of fiscal transfers

Recent sovereign debt crisis has challenged policy makers to explore the possibility of establishing a fiscal transfer system that could alleviate the negative impact of asymmetric shocks across countries. Using a simple labour production economy, we first derive an analytically tractable solution for optimal degree of fiscal transfers. In this economy, fiscal transfers can improve welfare by moving the competitive equilibrium with fiscal transfers closer to the social planner's solution. We then extend the model to a DSGE setting with capital, international bond and linear taxes, and we analyze how implementation of a simple revenue sharing rule affects welfare and macroeconomic variables over time. Simulation results show that risk sharing through fiscal transfers always improves welfare in the long run. However, under certain model specifications, short‐run transitional welfare loss can outweigh the long‐run benefits. These results suggest that, in designing fiscal transfers across countries, government should take into consideration the intertemporal nature of welfare gains.     

Options and strategies for fiscal consolidation in India

This paper uses a multi-region dynamic stochastic general equilibrium (DSGE) model to study options and strategies for fiscal consolidation in India. The challenge for India is how to put public finances on a more sustainable footing while preserving the potential for high growth and attenuating the adverse consequences on the needy. We analyze the macroeconomic implications of three fiscal consolidation scenarios. A “benchmark” case based on authorities' intentions that reduces government consumption, general transfers, and strengthens consumption tax collection; a “growth-friendly” that reallocates the savings to more public investment; and a “social-friendly” scenario that equally reallocates the savings between more public investment and more transfers to households excluded from the financial system. The simulations indicate that fiscal consolidation yields considerable long-term benefits and also entails output costs in the near term. Growth outcomes are better under the growth-friendly and social-friendly scenarios. These consolidation scenarios alone are not enough to maximize net gains for India. Other factors, such as the pace of consolidation, the combination with structural reforms and external economic conditions, play a critical role in the success of fiscal consolidation.     

Political determinants of intergovernmental transfers in a regionally decentralized authoritarian regime: evidence from China

This article examines the political determinants of the allocation of intergovernmental transfers in the context of China. In a regionally decentralized authoritarian regime, a government marked by political centralization and fiscal decentralization, intergovernmental transfers are employed by politicians as instruments to achieve political goals. Using China’s provincial data from 1994 to 2009, we find that the officials’ political power is an important factor in the distribution process. A party secretary’s replacement facilitates an increase in transfers, especially if the replacement comes from the central government. If a party secretary is a member of the Central Politburo, the province receives more conditional transfers than others. The central government allocates the transfers in such a way that the province with a high proportion of the minority population receives more transfers than others.     

Intergovernmental fiscal transfers and local tax efforts: evidence from provinces in China

This paper explores the incentive effects of total central fiscal transfers and its components – tax rebates and equalization grants – on provincial tax efforts in China. Our theoretical model predicts negative impacts on provincial tax efforts from both total fiscal transfers and equalization grants, while the effects of tax rebates are theoretically unclear. Using Chinese provincial panel data from 1995 to 2007, our empirical study provides significant evidence on the theoretical implications.     

Fiscal federalism in monetary unions: hypothetical fiscal transfers within the Euro-zone

Net fiscal transfers are commonly seen as a possible means to ensure the well-functioning of a currency area. We show that US net fiscal transfers, measured as the difference between gross federal revenues and federal expenditures per state, are enormous. Moreover, we run panel regressions that suggest their dependence on relative GDP and relative GDP growth during crisis periods, evidence of net fiscal transfers from relatively rich to relatively poor states (redistributive effect) and to states with an underperforming economic development (stabilization effect). The Euro-zone (EZ) lacks a system of fiscal federalism, which raises the question of whether it should be established in the medium- and long-run. If so, which should be the magnitude of net fiscal transfers? We calculate these transfers hypothetically for 1999–2010, using a relative volume comparable to the one in the USA.     

The contribution of equalization transfers to fiscal adjustment: Empirical results for German municipalities and a US–German comparison

This paper considers the role of fiscal equalization in maintaining fiscal balance. It employs a large panel of German municipalities in order to investigate the dynamic fiscal policy adjustment using a vector-error–correction model that explicitly takes account of the intertemporal budget constraint. The results confirm that a substantial part of fiscal adjustment to revenue shocks takes place by offsetting changes in intergovernmental transfers: in present-value terms about 34 cents of a permanent 1 € decrease in own revenues are compensated by subsequent changes in fiscal-equalization transfers. Hence, the contribution of intergovernmental transfers in maintaining fiscal balance is found to be two to three times larger than in the case of US municipalities investigated by Buettner and Wildasin [Buettner, T., Wildasin, D.E., 2006. The dynamics of municipal fiscal adjustment. Journal of Public Economics 90, 1115–1132]. Despite fiscal equalization, however, expenditures are not found to display smaller fluctuations in the German case.     

Payments for environmental services as an alternative to logging under weak property rights: The case of Indonesia

Decentralization reforms in Indonesia have led to local communities negotiating logging agreements with timber companies for relatively low financial payoffs and at high environmental cost. This paper analyzes the potential of payments for environmental services (PES) to provide an alternative to logging for these communities and to induce forest conservation. We apply a game-theoretical model of community-firm interactions that explicitly considers two stylized conditions present in the Indonesian context: (i) community rights to the forest remain weak even after decentralization, and (ii) the presence of logging companies interested in the commercial exploitation of the forest. Intuition may suggest that PES design should focus on those communities with the lowest expected payments from logging deals. However, we show that these communities may not be able to enforce a PES agreement, i.e., they may not be able to prevent logging activities by timber companies. Moreover, some communities would conserve the forest anyway; in these cases PES would not lead to additional environmental gains. Most important, the introduction of PES may increase a community's expected payoff from a logging agreement. A failure to consider this endogeneity in expected payoffs could lead to communities opting for logging agreements despite PES, simply allowing communities to negotiate better logging deals. Our results indicate that PES design is a complex task, and that the costs of an effective PES system could potentially be much higher than expected from observing current logging fees. Using data collected in Indonesia on actual logging fees received by communities, we illustrate how the theoretical results could be used in empirical analysis to guide PES design. Our results are likely to be useful in other cases where local people make resource use decisions but have weak property rights over these resources, and where external commercial forces are present. The results highlight the importance of understanding the details of the local context in order to design PES programs appropriately.     

Decentralized payments for environmental services: The cases of Pimampiro and PROFAFOR in Ecuador

Few payment for environmental services (PES) schemes in developing countries operate outside of the central state's umbrella, and are at the same time old enough to allow for a meaningful evaluation. Ecuador has two such decentralised, consolidated experiences: the five-year old Pimampiro municipal watershed-protection scheme and the twelve-year old PROFAFOR carbon-sequestration programme. We describe and compare the two cases, using a common PES definition and methodology, drawing on both primary interview-based information and secondary data. We find that both schemes have been relatively effective in reaching their environmental objectives, in terms of having probably high additionality levels and low leakage effects. A strong focus on the targeted environmental service and a strong degree of conditionality seem to be two key factors explaining these achievements. Although neither scheme has targeted poverty alleviation or other side objectives, both are likely to have improved PES recipients' welfare, mostly through higher incomes. We highlight several observations with more generalised relevance and lessons for the design of PES schemes.     

Stochastic mechanisms in settings without monetary transfers: The regular case

We analyze relative performance of stochastic and deterministic mechanisms in an environment that has been extensively studied in the literature on communication (e.g., [Vincent P. Crawford, Joel Sobel, Strategic information transmission, Econometrica 50 (6) (1982) 1431-1451]) and optimal delegation (e.g., [Bengt Holmström, On the theory of delegation, in: M. Boyer, R.E. Kihlstrom (Eds.), Bayesian Models in Economic Theory, North-Holland, 1984, pp. 115-141]): a principal-agent model with hidden information, no monetary transfers, and single-peaked preferences. We demonstrate that under the common assumption of quadratic payoffs and a certain regularity condition on the distribution of private information and the agent's bias, the optimal mechanism is deterministic. We also provide an explicit characterization of this mechanism.     

Federal transfers, environmental policy and economic growth

We study the effects of commonly used cross-country transfer programs on uncoordinated national environmental policies, economic growth and natural resources in a federal economy. Natural resources are a federation-wide public good. In each member country, production degrades the environment, but clean-up policy can improve it. Clean-up policy is financed by taxes on polluting firms’ output and cross-country redistributive transfers. We solve for a symmetric Nash equilibrium among national governments. Transfer policies that lead to higher pollution taxes make existence harder, and are harmful not only to growth but also to the environment. The best way to improve environmental quality is to implement a taxation system that stimulates growth and broadens tax bases to finance national clean-up policies.     

Bilateral transfers and lending in international environmental cooperation

The paper analyzes environmental lending and transfers in a two country general equilibrium framework. The lender country chooses specific environmental investments which it finances in the neighbour country on the basis of the returns they generate for the lender. The gains from this kind of international environmental financing are illustrated with a numerical calibration of the model showing that the gains to the lender country may be fairly sizable in relation to the expenditure directed currently towards environmental protection. These gains, however, essentially depend on the terms of the environmental financing. We also find that debt-for-nature swaps do not in general produce efficient environmental protection if applied uniformly in international environmental financing.     

Environmental taxation for environmental regulation and fiscal policy: An analysis of a Clinton-type BTU tax

This paper provides an empirical study of energy taxes for achieving environmental and fiscal policy objectives. Based on an energy tax structured like Clinton's 1993 BTU tax proposal, we demonstrate that the optimal tax will be higher the greater the environmental costs associated with energy consumption and the larger the economic distortions associated with alternative revenue-raising policies. Greater environmental damages and higher revenue-raising costs also have a fiscal policy implication; they shift the least-cost tax mix for raising additional revenue toward energy taxes and away from conventional tax alternatives.The authors wish to acknowledge the assistance of two anonymous referees, who provided very helpful feedback. We also wish to acknowledge outstanding research assistance from Tracy Terry of the School of Public and Environmental Affairs, Indiana University Bloomington. Of course, the results and conclusions of the paper are the authors' exclusively.