Accountability and fiscal equalization

A common feature of multi-jurisdictional systems is equalization programs. The implementation of such programs, that is based on some measurement of sub-national fiscal capacity and effort, is particularly complex. Within a political economy model, this paper analyzes the impact of such systems on accountability, identifying a positive and a negative effect. The positive effect arises because with equalized fiscal resources, a consequence of equalization, citizens attach more importance to any remaining variation in public good supplies and so punish rent-taking more severely. This induces politicians to restrain themselves and so accountability improves. The negative effect arises because the complexity of such programs reduces the informational content of observed public good supplies. This introduces a perverse fiscal incentive that reduces accountability. Thus, the overall impact of equalization programs on accountability depends on the balance of these effects.     

Political bargaining in a federation: Buchanan meets Coase

In recent decades, the issues of federalism and political integration have gained prominence in public debate as well as in the academic realm. A frequently made point is that allowing free secession may protect the minority's interests, thus providing it with an incentive to enter the federation. This paper explicitly considers the political process in the federation arguing that the option to secede may distort the political choices made by the individual regions to improve their bargaining positions. As a result, the allocation of resources in the federation could well end up being inefficient and unattractive for the minority region. In contrast, limiting the secession possibilities by requiring the consent of a majority of voters through a regional referendum, rather than leaving it to the discretion of the legislature, restores efficiency.     

An endogenous policy model of hierarchical government

Endogenous policy models usually neglect that government policies are frequently the result of decisions taken at different tiers by different agents, each enjoying some degree of autonomy. In this paper, policies are the outcome of the choices made by two agents within a hierarchy. A legislator decides on the budget to be successively spent by a bureaucrat. Both agents are lobbied by one or two interest groups. The combination of sequential decisionmaking and lobbying implies that the interaction between the agent at one tier and the interest group(s) depends on the exchange between the same interest group(s) and the agent at the other tier. Our results concerning multi-tier lobbying and legislatorial oversight substantially qualify the conventional wisdom related to one-tier lobbying. In particular, the reaction of the legislator to lobbying at the bureaucratic tier may make lobbying wasteful even when there is no competition from other lobbies. Moreover, the legislator benefits from lobbying only when there is competition between interest groups at the upper tier. It is also shown that competition for influence at the bureaucratic tier may work as a perfect substitute for legislatorial oversight. Extensions of the model indicate its usefulness for the analysis of decisionmaking in other multilevel governance structures, like federations or firms.     

Central governance or subsidiarity: A property-rights approach to federalism

We consider a model where one region in a federation can realize a public project after undertaking value-increasing investments. While negotiations on the federal level ensure that an efficient project size is implemented in equilibrium, non-contractibility of investments causes the overall outcome to differ across regimes. If the region bears the entire implementation costs of its policies, underinvestment prevails and subsidiarity (centralized governance) is superior when spillovers are weak (strong). Conversely, if linear cost sharing arrangements are feasible, decentralized authority often admits a socially optimal outcome while centralized authority (with majority or unanimity rule) does not.     

Fiscal decentralization and government quality in the OECD

Using indicators of fiscal decentralization which control for intergovernmental transfers and grants, it is shown that decentralization has a positive impact on government quality but that this positive effect is mitigated in the presence of regional elections and multi-level government.     

A note on contribution games with loss functions

Decisions on joint funding of continuous public goods between two agents often involve heterogeneous targets. We introduce loss functions in a contribution game in order to study the effect of this conflict. Unlike Varian (1994), joint contribution occurs only if the players’ targets are sufficiently close and the sequential game reduces free riding problems, while total contribution is higher in the simultaneous game.     

Performance rating and yardstick competition in social service provision

This paper investigates whether national evaluation of decentralised government performance tends, by lessening local information spill-overs, to reduce the scope for local performance comparisons and consequently to lower the extent of spatial auto-correlation among local government expenditures. It analyses local government expenditures on personal social services in the UK before and after the introduction of a national performance assessment system (SSPR, Social Services Performance Rating) that would attribute a rating to each local authority. The empirical evidence is consistent with the hypothesis that the SSPR has reduced local yardstick competition.     

The effects of economic and political integration on fiscal decentralization: evidence from OECD countries

Abstract .  This paper examines the impact of economic and political integration on the vertical government structure. It argues that, by increasing the market size and the benefits of decentralized provision of public goods, integration triggered the recent process of decentralization in OECD countries. A panel analysis relates the degree of fiscal decentralization to economic and European integration, controlling for interregional heterogeneity, economies of scale, and institutions. The results mostly support a decentralizing effect of economic integration in general and of European integration in particular for heterogeneous EU countries, whereas participation of subnational governments in national decision-making is associated with more centralization.     

Fiscal decentralization and government size: The role of democracy

This paper examines how the level of democracy in a country affects the relationship between fiscal decentralization and government size. We argue that political regimes, proxied by their democracy levels, are important for different decentralization theories to predict the impact of fiscal decentralization on government size. We test this argument using panel data from 76 developed and developing countries during 1972–2013. We find strong and robust evidence that fiscal decentralization is negatively associated with government size and that a higher level of democracy tends to mitigate the negative impact of fiscal decentralization. Therefore, our study contributes to the literature by offering a novel insight on mixed results regarding the relationship between fiscal decentralization and government size in the literature.     

Decentralizing antipoverty program delivery in developing countries

We study the effects on accountability in government service delivery of decentralizing administration of an antipoverty program. While governments at both central and local levels are vulnerable to antipoor policy biases owing to political capture, centralized delivery systems are additionally prone to bureaucratic corruption, owing to problems in monitoring bureaucratic performance. Decentralizing the delivery system promotes cost-effectiveness and improves intraregional targeting at low program scales. But interregional targeting may deteriorate, as central grants to high-poverty regions shrink, owing to high capture of local governments by local elites in such regions.     

Electoral goals and center-state transfers: A theoretical model and empirical evidence from India

We construct a model of redistributive politics where the central government is opportunistic and uses its discretion to make transfers to state governments on the basis of political considerations. These considerations are the alignment between the incumbent parties at the central and state levels and whether a state is a swing state or not. A testable prediction from the model is that a state that is both swing and aligned with the central government is especially likely to receive higher transfers. We test this prediction using Indian data for 14 states from 1974–75 to 1996–97. We find that a state which is both aligned and swing in the last state election is estimated to receive 16% higher transfers than a state which is unaligned and non-swing.     

On the determinants of local government performance: A two-stage nonparametric approach

This article analyzes the efficiency of local governments in the Comunitat Valenciana (Spain) and their main explanatory variables. The analysis is performed in two stages. Firstly, efficiency is measured via (nonparametric) activity analysis techniques. Specifically, we consider both Data Envelopment Analysis (DEA) and Free Disposable Hull (FDH) techniques. The second stage identifies some critical determinants of efficiency, focusing on both political and fiscal policy variables. In contrast to previous two-stage research studies, our approach performs the latter attempt via nonparametric smoothing techniques, rather than econometric methods such as OLS or Tobit related techniques. Results show that efficiency scores, especially under the nonconvexity assumption (FDH), are higher for large municipalities. Thus, there is empirical evidence to suggest that resources may be better allocated by large municipalities. However, the inefficiency found is not entirely attributable to poor management, as second-stage analysis reveals both fiscal and political variables to be explicably related to municipality performance. Moreover, the explanatory variables’ impact on efficiency is robust to the chosen technique—either convex DEA or nonconvex FDH.     

Fiscal decentralization,fiscal rules and fiscal discipline

Fiscal decentralization (FD) and fiscal rules (FR) are institutional mechanisms that are implemented by varying degrees in increasing number of countries. This paper investigates empirically the effect of FR on the effectiveness of FD in achieving fiscal discipline. Panel evidence strongly supports that balanced budget and expenditure rules help FD to achieve this goal, while debt rule has a direct disciplinary effect.     

A model of political parties

This paper presents a new model of political parties. I assume that the role of parties is to increase the commitment ability of politicians vis-à-vis the voters. Whereas a politician running alone can only offer his ideal policy, the set of policies that a party can commit to is the Pareto set of its members. I show that the commitment mechanisms provided by the institution of parties has no effect when the policy space is unidimensional; the policies parties can induce in equilibrium arise also when politicians are running independently. However, when the policy space is multidimensional, politicians use the vehicle of parties to offer equilibrium policies that they cannot offer in their absence.     

Are elections debt brakes? Evidence from French municipalities

We show that voters are fiscal conservatives, although in the long run only: while the average (over the mandate) level of debt has a negative impact on the probability of reelection, pre-election debt accumulation by incumbents increases their probability of reelection. As the negative impact becomes larger as the debt level becomes higher, it compensates for the short run effect. Elections thus appear as a disciplining device, even if a weak one.     

Inequality in democracies: Testing the classic democratic theory of redistribution

The classic democratic theory of redistribution claims that an increase in the mean-to-median (MM) income ratio causes a majority coalition in the electorate to collectively demand more redistribution. The functional dependence of redistribution on the MM income ratio is tested in parametric and nonparametric regression frameworks using an OECD panel dataset. While the parametric regression model is found to be misspecified rendering subsequent inference invalid, the robust nonparametric regression model fails to uncover evidence that the MM income ratio is relevant for predicting redistribution.     

Expressive and Instrumental Voting: The Scylla and Charybdis of Constitutional Political Economy

Brennan and Hamlin [(2002) Constitutional Political Economy 13(4): 299–311] noted that expressive voting still holds at the constitutional phase. The argument, when taken to its necessary conclusion, proves quite problematic for Constitutional Political Economy. Veil mechanisms following Buchanan induce expressive voting at the constitutional phase, removing the normative benefits ascribed to the hypothetical unanimity principle. If the constitution is authored by a small group and the veil is thereby removed, instrumental considerations come to bear and the authors of the constitution establish themselves as Oligarch.     

Fiscal federalism and lobbying

Which government functions should be decentralized (resp. centralized) once lobbying behavior is taken into account? We find that the answer largely depends on how the interests of the regional lobbies are positioned with respect to the function to be decentralized (resp. centralized). When regional lobbies have conflicting interests, then lobbying is less damaging for social welfare under centralization than under decentralization. On the contrary, when regional lobbies have aligned interests, then lobbying is less damaging for social welfare under decentralization, provided that policy spillovers on the non-organized groups are not too strong.     

Taxation and social protection under governance decentralisation

Governments do not have perfect information regarding constituent priorities and needs. This lack of knowledge opens the door for groups to lobby in order to affect the taxes they pay the government. We examine the political economy of a decentralised revenue-raising authority in light of social protection expenditures by constructing a theoretical model of hierarchical contests and comparing the implications of centralised with decentralised governance. Increasing information available to the government may generate additional expenditures by constituencies trying to affect government taxation decisions.     

Decentralisation or patronage: What determines government's allocation of development spending in a unitary country? Evidence from Bangladesh

This paper contributes to the decentralisation and distributive politics literature by empirically investigating the determinants of public expenditure at the sub-national level in Bangladesh. We argue that fragmentation in a unitary developing country may not channel higher resources to local areas. Political motives may instead play a significant role in the allocation process. Using panel data methods and a novel dataset on government's district-wise allocation of annual development expenditure in Bangladesh covering the period from 2005 to 2009, the analysis focuses on the impact of local government fragmentation and tests key political distribution models (the core voter hypothesis, the swing voter hypothesis, and the political alignment theory). The results show that local government fragmentation does not have any significant impact on public spending at the district level. However, the core vote share, local elected representative's political alignment with the ruling party, and the raw number of ministers from a district are all significantly associated with higher expenditure allocation. No evidence was found in support of the swing voter hypothesis. Overall, the findings suggest that political motives matter and that the allocation of developing spending is significantly influenced by political patronage. This may be a signficant obstacle to SDGs progress, as development spending may not be governed by resource delivery mechanisms that effectively target the poor.