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The structure of authority, federalism, commitment and economic growth

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  • Ronald Edwards

Abstract

In a neoclassical growth model with many regions and a mobile factor, two federal arrangements are considered. In the first federal arrangement the central government chooses a uniform tax policy, whereas in the second each regional government chooses its own tax policy. The main result is that the first federal arrangement leads to high tax rates and economic stagnation, whereas the second leads to low tax rates and economic growth. This result stems from a time consistency problem. The lack of tax competition forces a time consistency problem on the central government under the first federal arrangement. In contrast, regional tax competition acts as a commitment device under the second federal arrangement. The fundamental feature in the environment that gives rise to different abilities of the state to commit is the different structure of authority within the state. Copyright Springer-Verlag Berlin/Heidelberg 2005

Suggested Citation

  • Ronald Edwards, 2005. "The structure of authority, federalism, commitment and economic growth," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 25(3), pages 629-648, April.
    • Handle: RePEc:spr:joecth:v:25:y:2005:i:3:p:629-648
    DOI: 10.1007/s00199-003-0457-1
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    Cited by:

    1. Bodman, Philip & Campbell, Harry & Le, Thanh, 2012. "Public investment, taxation, and long-run output in economies with multi-level governments," Economic Modelling, Elsevier, vol. 29(5), pages 1603-1611.
    2. Kellermann, Kersten, 2007. "Fiscal competition and a potential growth effect of centralization," KOFL Working Papers 4, Konjunkturforschungsstelle Liechtenstein (KOFL), Vaduz.
    3. Francis Amagoh & Aloysius Ajab Amin, 2012. "An Examination of the Impacts of Fiscal Decentralization on Economic Growth," International Journal of Business Administration, International Journal of Business Administration, Sciedu Press, vol. 3(6), pages 72-81, November.
    4. Bartolini, David & Ninka, Eniel & Santolini, Raffaella, 2017. "Tax Decentralisation, Labour productivity and Employment," MPRA Paper 81070, University Library of Munich, Germany.
    5. Thushyanthan Baskaran & Lars P. Feld & Jan Schnellenbach, 2016. "Fiscal Federalism, Decentralization, And Economic Growth: A Meta-Analysis," Economic Inquiry, Western Economic Association International, vol. 54(3), pages 1445-1463, July.
    6. Thushyanthan Baskaran & Lars P. Feld & Jan Schnellenbach, 2014. "Fiscal Federalism, Decentralization and Economic Growth: Survey and Meta-Analysis," CESifo Working Paper Series 4985, CESifo.

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