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Central Governance or Subsidiarity: A Property-Rights Approach to Federalism

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  • Christoph Lülfesmann

Abstract

The paper reconsiders the theory of fiscal federalism in a framework inspired by property-rights theory. We set up a two-period model where on a first stage a region in a federation can expend value-enhancing investments into a public project. The project can be implemented on a second stage, and causes spilovers on other regions. Under centralized as well as decentralized governance, negotiations on the federal level facilitate the realization of the efficient policy. Still, non-contractibility of investments causes the overall outcomes to differ across regimes. If the region with access to the public project 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 leads to a socially optimal outcome while centralized authority (with majority or unanimity rule) does not.

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Bibliographic Info

Paper provided by University of Bonn, Germany in its series Bonn Econ Discussion Papers with number bgse5_2001.

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Length: 25
Date of creation: Oct 2000
Date of revision:
Handle: RePEc:bon:bonedp:bgse5_2001

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Postal: Bonn Graduate School of Economics, University of Bonn, Adenauerallee 24 - 26, 53113 Bonn, Germany
Fax: +49 228 73 6884
Web page: http://www.bgse.uni-bonn.de

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Keywords: Federalism; Property Rithts; Grants;

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References

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  1. Oliver Hart & Sanford Grossman, 1985. "The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration," Working papers 372, Massachusetts Institute of Technology (MIT), Department of Economics.
  2. Persson, Torsten & Tabellini, Guido, 1996. "Federal Fiscal Constitutions: Risk Sharing and Redistribution," Journal of Political Economy, University of Chicago Press, vol. 104(5), pages 979-1009, October.
  3. Lockwood, Ben, 1998. "Distributive Politics and the Benefits of Decentralisation," CSGR Working papers series 10/98, Centre for the Study of Globalisation and Regionalisation (CSGR), University of Warwick.
  4. David De Meza & Ben Lockwood, 1998. "Does Asset Ownership Always Motivate Managers? Outside Options And The Property Rights Theory Of The Firm," The Quarterly Journal of Economics, MIT Press, vol. 113(2), pages 361-386, May.
  5. Seabright, Paul, 1996. "Accountability and decentralisation in government: An incomplete contracts model," European Economic Review, Elsevier, vol. 40(1), pages 61-89, January.
  6. Aghion, Philippe & Tirole, Jean, 1994. "Formal and Real Authority in Organizations," IDEI Working Papers 37, Institut d'Économie Industrielle (IDEI), Toulouse.
  7. Quigley, John M. & Rubinfeld, Daniel L., 1996. "Federalism and Reductions in the Federal Budget," National Tax Journal, National Tax Association, vol. 49(2), pages 289-302, June.
  8. Schmidt, Klaus M., 1996. "Incomplete contracts and privatization," European Economic Review, Elsevier, vol. 40(3-5), pages 569-579, April.
  9. Hart, Oliver & Moore, John, 1990. "Property Rights and the Nature of the Firm," Journal of Political Economy, University of Chicago Press, vol. 98(6), pages 1119-58, December.
  10. Klibanoff, Peter & Morduch, Jonathan, 1995. "Decentralization, Externalities, and Efficiency," Review of Economic Studies, Wiley Blackwell, vol. 62(2), pages 223-47, April.
  11. Robert P. Inman & Daniel L. Rubinfeld, 1997. "Rethinking Federalism," Journal of Economic Perspectives, American Economic Association, vol. 11(4), pages 43-64, Fall.
  12. Ellingsen, Tore, 1998. "Externalities vs internalities: a model of political integration," Journal of Public Economics, Elsevier, vol. 68(2), pages 251-268, May.
  13. Schmidt, Klaus M., 1996. "Incomplete contracts and privatization," Munich Reprints in Economics 19776, University of Munich, Department of Economics.
  14. Caillaud, B. & Jullien, B. & Picard, P., 1996. "Hierarchical organization and incentives," European Economic Review, Elsevier, vol. 40(3-5), pages 687-695, April.
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Cited by:
  1. Kessler, Anke & Luelfesmann, Christoph & Myers, Gordon M, 2009. "The Architecture of Federations: Constitutions, Bargaining, and Moral Hazard," CEPR Discussion Papers 7244, C.E.P.R. Discussion Papers.
  2. Toke S. Aidt & Jayasri Dutta, 2010. "Fiscal federalism and electoral accountability," Working Papers 2010/11, Institut d'Economia de Barcelona (IEB).
  3. Staal, Klaas, 2006. "Incentives for separation and incentives for public good provision," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 104, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
  4. Akai, Nobuo & Sato, Motohiro, 2011. "A simple dynamic decentralized leadership model with private savings and local borrowing regulation," Journal of Urban Economics, Elsevier, vol. 70(1), pages 15-24, July.
  5. Grüner, Hans Peter, 2007. "Protocol Design and (De-)Centralization," CEPR Discussion Papers 6357, C.E.P.R. Discussion Papers.
  6. Juan Luis Jiménez & Javier Campos, 2004. "Efectos de la descentralización de la política de defensa de la competencia," Documentos de trabajo conjunto ULL-ULPGC 2004-09, Facultad de Ciencias Económicas de la ULPGC.

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