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Why is Argentina’s Fiscal Federalism so Inefficient? Entering the Labyrinth

A long-standing concern in political economy is whether outcomes are efficient in political equilibrium. Recent contributions have examined the efficiency/inefficiency of policy choices from a theoretical point of view. The aim of this paper is to examine such issue empirically. Building on existing "economic" diagnoses that highlight the deficient incentives present in Argentina’s Federal Tax-Sharing Agreement the paper will attempt to understand the politics behind its adoption and persistence. We suggest an explanation based on the transaction costs of Argentina’s political market. Although potentially Pareto-improving policies could have been adopted, they were not introduced because of the uncertainty over the future status of today’s bargains, and given the lack of institutions to enforce bargains among the political actors. The paper concludes offering some preliminary ideas for institutional engineering: what governance structures could help reduce these transaction costs? The purpose is to create an institutional framework in which political actors could negotiate among themselves, ensuring the enforceability of agreements, in order to achieve more efficient outcomes.

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Article provided by Universidad del CEMA in its journal Journal of Applied Economics.

Volume (Year): II (1999)
Issue (Month): (May)
Pages: 169-209

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Handle: RePEc:cem:jaecon:v:2:y:1999:n:1:p:169-209
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  1. Cukierman, Alex & Tommasi, Mariano, 1998. "When Does It Take a Nixon to Go to China?," American Economic Review, American Economic Association, vol. 88(1), pages 180-97, March.
  2. Denzau, Arthur T & North, Douglass C, 1994. "Shared Mental Models: Ideologies and Institutions," Kyklos, Wiley Blackwell, vol. 47(1), pages 3-31.
  3. Besley, Timothy & Coate, Stephen, 1998. "Sources of Inefficiency in a Representative Democracy: A Dynamic Analysis," American Economic Review, American Economic Association, vol. 88(1), pages 139-56, March.
  4. Coate, Stephen & Morris, Stephen, 1995. "On the Form of Transfers in Special Interests," Journal of Political Economy, University of Chicago Press, vol. 103(6), pages 1210-35, December.
  5. Mariano Tommasi, 1995. "Where are we in the Political Economy of Reform?," UCLA Economics Working Papers 733, UCLA Department of Economics.
  6. Sanguinetti, Pablo & Tommasi, Mariano, 2004. "Intergovernmental transfers and fiscal behavior insurance versus aggregate discipline," Journal of International Economics, Elsevier, vol. 62(1), pages 149-170, January.
  7. Acemoglu, Daron & Robinson, James A, 1999. "Inefficient Redistribution," CEPR Discussion Papers 2122, C.E.P.R. Discussion Papers.
  8. Wittman, Donald, 1989. "Why Democracies Produce Efficient Results," Journal of Political Economy, University of Chicago Press, vol. 97(6), pages 1395-1424, December.
  9. Guillermo Mondino & Federico Sturzenegger & Mariano Tommasi, 1992. "Recurrent High Inflation and Stabilization, A Dynamic Game," UCLA Economics Working Papers 678, UCLA Department of Economics.
  10. Weingast, Barry R & Marshall, William J, 1988. "The Industrial Organization of Congress; or, Why Legislatures, Like Firms, Are Not Organized as Markets," Journal of Political Economy, University of Chicago Press, vol. 96(1), pages 132-63, February.
  11. Joshua Aizenman & Peter Isard, 1991. "Externalities, Incentives and Failure to Achieve National Objectives in Decentralized Economies," NBER Working Papers 3650, National Bureau of Economic Research, Inc.
  12. Tommasi, Mariano, 1999. "On high inflation and the allocation of resources," Journal of Monetary Economics, Elsevier, vol. 44(3), pages 401-421, December.
  13. Sturzenegger, Federico & Tommasi, Mariano, 1994. "The Distribution of Political Power, the Costs of Rent-Seeking, and Economic Growth," Economic Inquiry, Western Economic Association International, vol. 32(2), pages 236-48, April.
  14. Joskow, Paul L, 1974. "Inflation and Environmental Concern: Structural Change in the Process of Public Utility Price Regulation," Journal of Law and Economics, University of Chicago Press, vol. 17(2), pages 291-327, October.
  15. Becker, Gary S, 1983. "A Theory of Competition among Pressure Groups for Political Influence," The Quarterly Journal of Economics, MIT Press, vol. 98(3), pages 371-400, August.
  16. Aizenman, Joshua, 1993. "Soft Budget Constraints, Taxes, and the Incentive to Cooperate," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 34(4), pages 819-32, November.
  17. Pablo Sanguinetti, 1994. "Intergovernmental transfers and public sector expenditures: a game-theoretic approach," Estudios de Economia, University of Chile, Department of Economics, vol. 21(2 Year 19), pages 179-212, December.
  18. Juliana Bambaci & Tamara Saront & Mariano Tommasi, 2002. "The Political Economy of Economic Reforms in Argentina," Journal of Economic Policy Reform, Taylor & Francis Journals, vol. 5(2), pages 75-88.
  19. Tabellini, Guido, 1986. "Money, debt and deficits in a dynamic game," Journal of Economic Dynamics and Control, Elsevier, vol. 10(4), pages 427-442, December.
  20. Jones, Mark P. & Sanguinetti, Pablo & Tommasi, Mariano, 2000. "Politics, institutions, and fiscal performance in a federal system: an analysis of the Argentine provinces," Journal of Development Economics, Elsevier, vol. 61(2), pages 305-333, April.
  21. Mariano Tommasi, 1992. "Inflation and Relative Prices Evidence from Argentina," UCLA Economics Working Papers 661, UCLA Department of Economics.
  22. Dixit, Avinash K & Londregan, John, 1994. "Redistributive Politics and Economic Efficiency," CEPR Discussion Papers 1056, C.E.P.R. Discussion Papers.
  23. Joseph E. Stiglitz, 1996. "Whither Socialism?," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262691825, June.
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