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Fiscal decentralization policies and sub-national government debt in evolving federations

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  • Teresa Garcia-Milà

    ()

  • Timothy J. Goodspeed
  • Therese J. McGuire

Abstract

As part of a process of democratization, many countries spanning Europe, Latin Amertica, Africa, and Asia are reorganizing their governments by devolving fiscal responsibility and authority to newly empowered regional and local governments. Although decentralization in each country proceeds differently, a common element tends to be an initially heavy reliance on central government grants to fund regional spending. We develop a theoretical model of regional borrowing decisions in which the incentives for regional borrowing depend crucially on how the regions expect the federal system of finance to evolve. We examine the implications of the model using data on Spanish regions for the period 1984-1995 and find evidence that regions may be borrowing inefficiently in response to incentives imbedded in the Spanish system of fiscal decentralization.

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Bibliographic Info

Paper provided by Department of Economics and Business, Universitat Pompeu Fabra in its series Economics Working Papers with number 549.

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Date of creation: Jul 2001
Date of revision: May 2002
Handle: RePEc:upf:upfgen:549

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Web page: http://www.econ.upf.edu/

Related research

Keywords: Fiscal decentralization; borrowing incentives;

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Cited by:
  1. David Cantarero & Marta Pascual & Roberto Fernandez & María A. García-Valiñas, 2004. "Local government debt: an application to the Spanish case," ERSA conference papers ersa04p282, European Regional Science Association.
  2. Pilar Sorribas-Navarro, 2006. "(When) Are Intergovernmental Transfers Used to Bail Out Regional Governments? Evidence from Spain 1986-2001," Working Papers 2006/7, Institut d'Economia de Barcelona (IEB).
  3. Massimo Bordignon, 2000. "Problems of Soft Budget Constraints in Intergovernmental Relationships: The Case of Italy," Research Department Publications 3099, Inter-American Development Bank, Research Department.
  4. Nuria Alcalde Fradejas & Jaime Vallés Giménez, 2002. "El mercado financiero y el racionamiento del crédito. Estudio del caso de los gobiernos regionales en España," Hacienda Pública Española, IEF, vol. 160(1), pages 77-102, march.
  5. Luiz de Mello, 2007. "Local Government Finances: The Link between Intergovernmental Transfers and Net Worth," OECD Economics Department Working Papers 581, OECD Publishing.
  6. Sergey Sinelnikov & Pavel Kadochnikov & Ilya Trunin (ed.), 2006. "Fiscal Federalism in Russia: Soft Budget Constraints of Regional Governments," Books, Gaidar Institute for Economic Policy, edition 1, number 4.
  7. Peter Claeys, 2011. "If you want me to stay, pay," IREA Working Papers 201101, University of Barcelona, Research Institute of Applied Economics, revised Feb 2011.
  8. Teresa Garcia-Milà & Therese J. McGuire, 2002. "Fiscal decentralization in Spain: An asymmetric transition to democracy," Economics Working Papers 866, Department of Economics and Business, Universitat Pompeu Fabra.
  9. Breuillé, Marie-Laure & Madiès, Thierry & Taugourdeau, Emmanuelle, 2010. "Gross versus net equalization scheme in a federation with decentralized leadership," Journal of Urban Economics, Elsevier, vol. 68(2), pages 205-214, September.
  10. Sergey Sinelnikov & Pavel Kadochnikov & Ilya Trunin & Sergey Chetverikov & Marianne Vigneault, 2006. "Fiscal Federalism in Russia: Soft Budget Constraints of Regional Governments," Published Papers 47, Gaidar Institute for Economic Policy, revised 2012.
  11. Timothy Goodspeed, 2002. "Bailouts in a Federation," International Tax and Public Finance, Springer, vol. 9(4), pages 409-421, August.

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