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Decentralization and Fiscal Discipline in Sub-national Governments: Evidence from the Swiss Federal System

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  • Markus Freitag
  • Adrian Vatter
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    Abstract

    This article analyses the relationship between decentralization and the extent of fiscal discipline in the Swiss cantons between 1984 and 2000. From a theoretical point of view, decentralization and federalism can be associated with both an expansive and a dampening effect on government debt. On the one hand, decentralized structures have been argued to lead to a reduction of debt due to inherent competition between the member states and the multitude of veto positions which restrict public intervention. On the other hand, decentralization has been claimed to contribute to an increase of public debt as it involves expensive functional and organizational duplications as well as cost-intensive, often debt-financed, compromise solutions between a large number of actors that operate in an uncoordinated and contradictory way. Our empirical results show that in periods of prosperous economic development, the architecture of state structure has no impact on debt. However, the degree of decentralization influences debt in economically poor times: In phases of economic recession, administratively decentralized cantons implement a more economical budgetary policy than centralized Swiss member states. Copyright 2008, Oxford University Press.

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    Bibliographic Info

    Article provided by Oxford University Press in its journal Publius: The Journal of Federalism.

    Volume (Year): 38 (2008)
    Issue (Month): 2 (Spring)
    Pages: 272-294

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    Handle: RePEc:oup:publus:v:38:y:2008:i:2:p:272-294

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    Cited by:
    1. Aldasoro, Iñaki & Seiferling, Mike, 2014. "Vertical fiscal imbalances and the accumulation of government debt," SAFE Working Paper Series 61, Research Center SAFE - Sustainable Architecture for Finance in Europe, Goethe University Frankfurt.
    2. Baskaran, Thushyanthan, 2011. "Tax decentralization and public deficits in OECD countries," MPRA Paper 35141, University Library of Munich, Germany.
    3. Baskaran, Thushyanthan, 2010. "On the Link Between Fiscal Decentralization and Public Debt in OECD Countries," MPRA Paper 21599, University Library of Munich, Germany.
    4. Christoph A. Schaltegger & Lars P. Feld, 2007. "Are Fiscal Adjustments less Successful in Decentralized Governments?," CESifo Working Paper Series 1946, CESifo Group Munich.
    5. Johann Bröthaler & Michael Getzner, 2011. "Fiscal Autonomy and Total Government Expenditure: An Austrian Case-study," International Advances in Economic Research, Springer, vol. 17(2), pages 134-156, May.

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