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How Do Local Governments Decide on Public Policy in Fiscal Federalism? Tax vs. Expenditure Optimization Author info | Abstract | Publisher info | Download info | Related research | Statistics Marko Köthenbürger ()
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Previous literature widely assumes that taxes are optimized in local public finance while expenditures adjust residually. This paper endogenizes the choice of the optimization variable. In particular, it analyzes how federal policy toward local governments influences the way local governments decide on public policy. Unlike the presumption, the paper shows that local governments may choose to optimize over expenditures. The result most notably prevails when federal policy subsidizes local fiscal effort. The results offer a new perspective of the efficiency implications of federal policy toward local governments and, thereby, enable a more precise characterization of local government behaviour in fiscal federalism.
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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number
CESifo Working Paper No. 2385.
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Date of creation: 2008Date of revision:
Handle: RePEc:ces:ceswps:_2385Contact details of provider: Postal: Poschingerstrasse 5, 81679 Munich Phone: +49 (89) 9224-0 Fax: +49 (89) 985369 Web page: http://www.cesifo.de
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Keywords: tax vs. expenditure optimization ; federalism ; endogenous commitment ; fiscal incentives ; policy interaction ; Find related papers by JEL classification: H10 - Public Economics - - Structure and Scope of Government - - - General H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General H70 - Public Economics - - State and Local Government; Intergovernmental Relations - - - General
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