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Information transmission within federal fiscal architectures: Theory and evidence

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  • Axel Dreher
  • Kai Gehring
  • Christos Kotsogiannis
  • Silvia Marchesi

Abstract

This paper explores the role of information transmission and misaligned interests across levels of government in explaining variation in the degree of decentralization across countries. Within a two-sided incomplete information principal-agent framework, it analyzes two alternative policy-decision schemes —‘decentralization’ and ‘centralization’— when ‘knowledge’ consists of unverifiable information and the quality of communication depends on the conflict of interests between the government levels. It is shown that, depending on which level of policy decision-making controls the degree of decentralization, the extent of misaligned interests and the relative importance of local and central government knowledge affects the optimal choice of policy-decision schemes. The empirical analysis shows that countries’ choices depend on the relative importance of their private information and the results differ significantly between unitary and federal countries.

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File URL: http://dipeco.economia.unimib.it/repec/pdf/mibwpaper253.pdf
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Bibliographic Info

Paper provided by University of Milano-Bicocca, Department of Economics in its series Working Papers with number 253.

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Length: 49
Date of creation: Sep 2013
Date of revision: Sep 2013
Handle: RePEc:mib:wpaper:253

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Keywords: delegation; centralization; communication; fiscal decentralization; state and local government;

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References

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  1. World Bank, 2013. "World Development Indicators 2013," World Bank Publications, The World Bank, number 13191, January.
  2. Agnese Sacchi & Simone Salotti, 2014. "How regional inequality affects fiscal decentralisation: accounting for the autonomy of subcentral governments," Environment and Planning C: Government and Policy, Pion Ltd, London, vol. 32(1), pages 144-162, February.
  3. Marchesi, Silvia & Sabani, Laura & Dreher, Axel, 2011. "Read my lips: The role of information transmission in multilateral reform design," Journal of International Economics, Elsevier, vol. 84(1), pages 86-98, May.
  4. Kotsogiannis, Christos & Schwager, Robert, 2008. "Accountability and fiscal equalization," Journal of Public Economics, Elsevier, vol. 92(12), pages 2336-2349, December.
  5. Panizza, Ugo, 1999. "On the determinants of fiscal centralization: Theory and evidence," Journal of Public Economics, Elsevier, vol. 74(1), pages 97-139, October.
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  7. Wouter Dessein, 2002. "Authority and Communication in Organizations," Review of Economic Studies, Oxford University Press, vol. 69(4), pages 811-838.
  8. Ben Lockwood, 2002. "Distributive Politics and the Costs of Centralization," Review of Economic Studies, Oxford University Press, vol. 69(2), pages 313-337.
  9. Frey, Bruno S. & Luechinger, Simon, 2004. "Decentralization as a disincentive for terror," European Journal of Political Economy, Elsevier, vol. 20(2), pages 509-515, June.
  10. Lorenz Blume & Stefan Voigt, 2011. "Federalism and decentralization—a critical survey of frequently used indicators," Constitutional Political Economy, Springer, vol. 22(3), pages 238-264, September.
  11. BUCOVETSKY, Sam & MARCHAND, Maurice & PESTIEAU, Pierre, . "Tax competition and revelation of preferences for public expenditure," CORE Discussion Papers RP -1352, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  12. Horst Raff & John Wilson, 1997. "Income Redistribution with Well-Informed Local Governments," International Tax and Public Finance, Springer, vol. 4(4), pages 407-427, November.
  13. Bordignon, Massimo & Colombo, Luca & Galmarini, Umberto, 2008. "Fiscal federalism and lobbying," Journal of Public Economics, Elsevier, vol. 92(12), pages 2288-2301, December.
  14. Oates, Wallace E., 1988. "On the measurement of congestion in the provision of local public goods," Journal of Urban Economics, Elsevier, vol. 24(1), pages 85-94, July.
  15. Axel Dreher & Justina A. V. Fischer, 2009. "Government decentralization as a disincentive for transnational terror? An empirical analysis," Diskussionspapiere aus dem Institut für Volkswirtschaftslehre der Universität Hohenheim 313/2009, Department of Economics, University of Hohenheim, Germany.
  16. Rodrik, Dani, 2012. "Who Needs the Nation State?," CEPR Discussion Papers 9040, C.E.P.R. Discussion Papers.
  17. Charles M. Tiebout, 1956. "A Pure Theory of Local Expenditures," Journal of Political Economy, University of Chicago Press, vol. 64, pages 416.
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Cited by:
  1. Axel Dreher & Silvia Marchesi, 2013. "Information transmission and ownership consolidation in aid programs," Working Papers 255, University of Milano-Bicocca, Department of Economics, revised Oct 2013.

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