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Public budget composition, fiscal (de)centralization, and welfare

Author

Listed:
  • Calin Arcalean
  • Gerhard Glomm
  • Ioana Schiopu
  • Jens Suedekum

Abstract

We study the optimal degree of fiscal decentralization in a dynamic federal economy where governments decide on budget size and its allocation between public education and infrastructure spending. We find that full centralization of tax and expenditure policies is optimal when infrastructure productivity is similar across regions. When differences are not too large, partial centralization is optimal. With strong differences, full decentralization becomes optimal. National steady-state output tends to be highest under full decentralization. We provide a justification for the mixed evidence regarding the Oates conjecture by showing that full dominates partial decentralization, despite being inferior to complete decentralization.

Suggested Citation

  • 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.
    • Handle: RePEc:cje:issued:v:43:y:2010:i:3:p:832-859
    DOI: 10.1111/j.1540-5982.2010.01597.x
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    Cited by:

    1. Vladimir V. Dashkeev & Stephen J. Turnovsky, 2023. "Tax systems and public borrowing limits in a fiscal union," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 30(2), pages 351-395, April.
    2. Clemens Fuest & Volker Meier, 2021. "Will the Centralisation of Carbon Pricing Revenue in the EU Lead to Laxer Climate Policy?," CESifo Working Paper Series 8979, CESifo.
    3. Bibek Adhikari & Saroj Dhital, 2021. "Decentralization and regional convergence: Evidence from night‐time lights data," Economic Inquiry, Western Economic Association International, vol. 59(3), pages 1066-1088, July.
    4. Clemens Fuest & Volker Meier, 2024. "Will the centralization of carbon pricing revenue in the European Union lead to laxer climate policy?," Scandinavian Journal of Economics, Wiley Blackwell, vol. 126(3), pages 465-488, July.
    5. Tahir Yousaf, 2025. "Balancing act: Examining the trade‐offs between regional convergence and economic growth in China's province managing county reform," Economics of Transition and Institutional Change, John Wiley & Sons, vol. 33(2), pages 339-368, April.

    More about this item

    JEL classification:

    • H72 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Budget and Expenditures
    • H74 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Borrowing
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory

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