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Decentralization with Property Taxation to Improve Incentives: Evidence from Local Governments’ Discrete Choice

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Author Info

  • Jørn Rattsø

    ()
    (Department of Economics, Norwegian University of Science and Technology)

  • Jon Hernes Fiva

    ()
    (Centre for Economic Research and Department of Economics, Norwegian University of Science and Technology)

Abstract

Decentralization of government with property tax financing is the standard recipe for public sector reform. Fiscal competition is assumed to stimulate efficiency and hold down the tax level. Property taxation offers additional incentives for efficiency. We study the incentive mechanisms involved using data for decentralized governments and in a setting where they can choose to have property taxation or not. The empirical analysis addresses whether fiscal competition and political control problems influence the choice of having property taxation. The results indicate that both incentive mechanisms are relevant and consequently support the standard advice. Fiscal competition generates a distinct geographic pattern in local taxation and political fragmentation seems to motivate property taxation to control common pool problems. The main methodological challenge handled concerns spatial interaction with discrete choice.

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Bibliographic Info

Paper provided by Department of Economics, Norwegian University of Science and Technology in its series Working Paper Series with number 5305.

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Length: 28 pages
Date of creation: 01 Mar 2005
Date of revision: 02 Sep 2005
Handle: RePEc:nst:samfok:5305

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Keywords: property taxation; fiscal competition; political fragmentation; Bayesian analysis; spatial autoregressive model;

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Cited by:
  1. Sambidi, Pramod R. & Harrison, R. Wes, 2006. "Spatial Clustering of the U.S. Biotech Industry," 2006 Annual meeting, July 23-26, Long Beach, CA 21360, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
  2. Lars-Erik Borge & Jørn Rattsø, 2006. "Property taxation as incentive for cost control:Empirical evidence for utility services in Norway," Working Paper Series 7606, Department of Economics, Norwegian University of Science and Technology.

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