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Too big or too small? A synthetic view of the commitment problem of interregional transfers

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  • Akai, Nobuo
  • Sato, Motohiro

Abstract

There is a growing body of literature on the commitment problem of interregional transfers. The problem occurs because of an ex post bailout by a central government leading to ex ante adverse incentive consequences for a local government. However, different models have yielded different economic consequences. The local government may be too large, overspending and/or overborrowing, or it may be too small, raising less of its own revenue. In the presence of interregional spillovers, the equilibrium may yield a Pareto-efficient outcome. The present paper aims to synthesize these models, developing a simple decentralized leadership model. A critical question concerns what decision is made ex ante by the local government--namely public expenditure or tax collection--with the remaining policy instrument being residual adjusted by ex post transfers. We discuss how different scenarios affect the equilibrium outcome.

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  • Akai, Nobuo & Sato, Motohiro, 2008. "Too big or too small? A synthetic view of the commitment problem of interregional transfers," Journal of Urban Economics, Elsevier, vol. 64(3), pages 551-559, November.
  • Handle: RePEc:eee:juecon:v:64:y:2008:i:3:p:551-559
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    References listed on IDEAS

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    Cited by:

    1. Baskaran, Thushyanthan, 2012. "Soft budget constraints and strategic interactions in subnational borrowing: Evidence from the German States, 1975–2005," Journal of Urban Economics, Elsevier, vol. 71(1), pages 114-127.
    2. Anton Bondarev & Beat Hintermann & Frank C. Krysiak & Ralph Winkler, 2017. "The Intricacy of Adapting to Climate Change: Flood Protection as a Local Public Goods Game," CESifo Working Paper Series 6382, CESifo Group Munich.
    3. Boadway, Robin & Song, Zhen & Tremblay, Jean-François, 2013. "Non-cooperative pollution control in an inter-jurisdictional setting," Regional Science and Urban Economics, Elsevier, vol. 43(5), pages 783-796.
    4. Koethenbuerger, Marko, 2011. "How do local governments decide on public policy in fiscal federalism? Tax vs. expenditure optimization," Journal of Public Economics, Elsevier, vol. 95(11), pages 1516-1522.
    5. Emilson Silva, 2015. "Efficient earmarking under decentralized fiscal commitments," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 22(4), pages 683-701, August.
    6. Emilson Caputo Delfino Silva, 2017. "Tax competition and federal equalization schemes with decentralized leadership," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 24(1), pages 164-178, February.
    7. Timothy J. Goodspeed, 2017. "Bailouts and Soft Budget Constraints in Decentralized Government: A Synthesis and Survey of an Alternative View of Intergovernmental Grant Policy," Hacienda Pública Española, IEF, vol. 221(2), pages 113-134, June.
    8. Nithin K, 2015. "The Case of Revenue versus Expenditure Optimization in India," Working Papers 1528, Indian Institute of Foreign Trade.
    9. Linda Toolsema & Maarten Allers, 2014. "Welfare Financing: Grant Allocation and Efficiency," De Economist, Springer, vol. 162(2), pages 147-166, June.
    10. 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.
    11. repec:dgr:rugsom:12004-eef is not listed on IDEAS
    12. Thushyanthan Baskaran, 2013. "Do bailouts buy votes? Evidence from a panel of Hessian municipalities," Economics of Governance, Springer, vol. 14(3), pages 257-278, August.
    13. Akai, Nobuo & Sato, Motohiro, 2011. "A simple dynamic decentralized leadership model with private savings and local borrowing regulation," Journal of Urban Economics, Elsevier, vol. 70(1), pages 15-24, July.
    14. Arthur Caplan & Emilson Silva, 2011. "Impure public goods, matching grant rates and income redistribution in a federation with decentralized leadership and imperfect labor mobility," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 18(3), pages 322-336, June.
    15. Bellofatto, Antonio Andrés & Besfamille, Martín, 2018. "Regional state capacity and the optimal degree of fiscal decentralization," Journal of Public Economics, Elsevier, vol. 159(C), pages 225-243.
    16. Toolsema-Veldman, Linda & Allers, M.A., 2012. "Welfare financing," Research Report 12004-EEF, University of Groningen, Research Institute SOM (Systems, Organisations and Management).
    17. repec:spr:ecogov:v:18:y:2017:i:3:d:10.1007_s10101-017-0194-8 is not listed on IDEAS
    18. Aronsson, Thomas & Micheletto, Luca & Sjögren, Tomas, 2014. "A note on public goods in a decentralized fiscal union: Implications of a participation constraint," Journal of Urban Economics, Elsevier, vol. 84(C), pages 1-8.
    19. Breuillé, Marie-Laure & Vigneault, Marianne, 2010. "Overlapping soft budget constraints," Journal of Urban Economics, Elsevier, vol. 67(3), pages 259-269, May.
    20. Baskaran, Thushyanthan, 2014. "Bailouts and austerity," Center for European, Governance and Economic Development Research Discussion Papers 212, University of Goettingen, Department of Economics.

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