Public Budget Composition, Fiscal(De)Centralization, and Welfare
AbstractWe present a dynamic two-region model with overlapping generations. There are two types of public expenditure, education and infrastructure funding, and governments decide optimally on budget size (tax rate) and its allocation across the two outlays. Productivity of government infrastructure spending can differ across regions. This assumption follows well established empirical evidence, and highlights regional heterogeneity in a previously unexplored dimension. We study the implications of three different fiscal regimes for capital accumulation and aggregate national welfare. Full centralization of revenue and expenditure decisions is the optimal fiscal arrangement for the country when infrastructure spending productivity is similar across regions. When regional differences exist but are not too large, the partial centralization regime is optimal where the federal government sets a common tax rate, but allows the regional governments to decide on the budget composition. Only when the differences are sufficiently large does full decentralization become the optimal regime. National steady state output is instead highest when the economy is decentralized. This result is consistent with the “Oates conjecture” that fiscal decentralization increases capital accumulation. However, in terms of welfare this result can be reversed.
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Bibliographic InfoPaper provided by Center for Applied Economics and Policy Research, Economics Department, Indiana University Bloomington in its series Caepr Working Papers with number 2007-003.
Length: 32 pages
Date of creation: Feb 2007
Date of revision:
fiscal federalism; capital accumulation; infrastructure; public education;
Other versions of this item:
- Calin Arcalean & Gerhard Glomm & Ioana Schiopu & Jens Suedekum, 2010. "Public budget composition, fiscal (de)centralization, and welfare," Canadian Journal of Economics, Canadian Economics Association, vol. 43(3), pages 832-859, August.
- Arcalean, Calin & Glomm, Gerhard & Schiopu, Ioana & Suedekum, Jens, 2007. "Public Budget Composition, Fiscal (De)Centralization and Welfare," IZA Discussion Papers 2626, Institute for the Study of Labor (IZA).
- E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
- H5 - Public Economics - - National Government Expenditures and Related Policies
- H7 - Public Economics - - State and Local Government; Intergovernmental Relations
This paper has been announced in the following NEP Reports:
- NEP-ALL-2007-02-17 (All new papers)
- NEP-DGE-2007-02-17 (Dynamic General Equilibrium)
- NEP-MAC-2007-02-17 (Macroeconomics)
- NEP-PBE-2007-02-17 (Public Economics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Calin Arcalean & Gerhard Glomm & Ioana Schiopu, 2007.
"Growth Effects of Spatial Redistribution Policies,"
Caepr Working Papers
2007-002, Center for Applied Economics and Policy Research, Economics Department, Indiana University Bloomington.
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"On the Number and Size of Nations,"
The Quarterly Journal of Economics,
MIT Press, vol. 112(4), pages 1027-56, November.
- Arzaghi, Mohammad & Henderson, J. Vernon, 2005. "Why countries are fiscally decentralizing," Journal of Public Economics, Elsevier, vol. 89(7), pages 1157-1189, July.
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