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Fiscal Reconstruction and Local Government Financing

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  • Toshihiro Ihori

    ()

  • Jun-Ichi Itaya

    ()

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    Abstract

    This paper investigates the dynamic properties of intergovernmental financing during a fiscal reconstruction process by analyzing the dynamic game among local governments, which operates with soft budget constraints because of concessionary region-specific transfers from a central government. The existence of intergovernmental transfers induces the free-riding behavior of local governments, thereby bringing considerable deficits to the central government. Raising local and/or national taxes is desirable for fiscal reconstruction, but is unable to attain the Pareto-efficient fiscal reconstruction. Taxes on lobbying activities, combined with uniform transfers, induce earlier concession and can attain the Pareto-efficient outcome in the long run. Copyright Kluwer Academic Publishers 2004

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    File URL: http://hdl.handle.net/10.1023/B:ITAX.0000004777.75405.8c
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    Bibliographic Info

    Article provided by Springer in its journal International Tax and Public Finance.

    Volume (Year): 11 (2004)
    Issue (Month): 1 (January)
    Pages: 55-67

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    Handle: RePEc:kap:itaxpf:v:11:y:2004:i:1:p:55-67

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    Web page: http://www.springerlink.com/link.asp?id=102915

    Related research

    Keywords: fiscal reconstruction; free riding; soft-budget constraint;

    References

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    1. Alesina, Alberto & Drazen, Allan, 1991. "Why Are Stabilizations Delayed?," American Economic Review, American Economic Association, vol. 81(5), pages 1170-88, December.
    2. Kornai, J, 1979. "Resource-Constrained versus Demand-Constrained Systems," Econometrica, Econometric Society, vol. 47(4), pages 801-19, July.
    3. Becker, Gary S & Mulligan, Casey B, 2003. "Deadweight Costs and the Size of Government," Journal of Law and Economics, University of Chicago Press, vol. 46(2), pages 293-340, October.
    4. Batina, Raymond G., 1990. "Public goods and dynamic efficiency : The modified Samuelson rule," Journal of Public Economics, Elsevier, vol. 41(3), pages 389-400, April.
    5. Boadway, R.W. & Pestieau, P. & Wildasin, D.E., 1987. "Tax-transfer policies and the voluntary provision of public goods," CORE Discussion Papers 1987019, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    6. V.V. Chari & Harold Cole, 1993. "Why are representative democracies fiscally irresponsible?," Staff Report 163, Federal Reserve Bank of Minneapolis.
    7. Bernheim, B Douglas, 1986. "On the Voluntary and Involuntary Provision of Public Goods," American Economic Review, American Economic Association, vol. 76(4), pages 789-93, September.
    8. Ihori, Toshihiro & Itaya, Jun-ichi, 2001. "A dynamic model of fiscal reconstruction," European Journal of Political Economy, Elsevier, vol. 17(4), pages 779-797, November.
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    Cited by:
    1. Toshihiro Ihori, 2013. "Fiscal Fluctuation Risks and Intergovernmental Functional Allocation," Public Policy Review, Policy Research Institute, Ministry of Finance Japan, vol. 9(1), pages 1-32, January.

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