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Fiscal Reconstruction and Local Government Financing

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  • Toshihiro Ihori
  • Jun-Ichi Itaya

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

Suggested Citation

  • Toshihiro Ihori & Jun-Ichi Itaya, 2004. "Fiscal Reconstruction and Local Government Financing," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 11(1), pages 55-67, January.
    • Handle: RePEc:kap:itaxpf:v:11:y:2004:i:1:p:55-67
    DOI: 10.1023/B:ITAX.0000004777.75405.8c
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    References listed on IDEAS

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    1. 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.
    2. Toshihiro Ihori, 2014. "Commitment, Deficit Ceiling, and Fiscal Privilege," CIRJE F-Series CIRJE-F-920, CIRJE, Faculty of Economics, University of Tokyo.
    3. Toshihiro Ihori, 2015. "Flexibility of Deficit Ceiling and Income Fluctuation," Public Policy Review, Policy Research Institute, Ministry of Finance Japan, vol. 11(2), pages 231-246, March.

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