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Regional state capacity and the optimal degree of fiscal decentralization

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  • Bellofatto, Antonio Andrés
  • Besfamille, Martín

Abstract

We study the optimal degree of fiscal decentralization in a federation. Regional governments are characterized by their abilities to deliver public goods (administrative capacity) and to raise tax revenues (fiscal capacity). Two regimes are compared on efficiency grounds. Under partial decentralization, regional governments rely on central bailouts to complete local projects in financing needs. Under full decentralization, marginal financing is achieved via local capital taxes. We show that the presence of sufficiently low levels of administrative capacity is a necessary condition for full decentralization dominance. This condition may also be sufficient, depending on the projects' characteristics. Some extensions are presented.

Suggested Citation

  • 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.
  • Handle: RePEc:eee:pubeco:v:159:y:2018:i:c:p:225-243
    DOI: 10.1016/j.jpubeco.2017.12.010
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    Cited by:

    1. Aslim, Erkmen Giray & Neyapti, Bilin, 2017. "Optimal fiscal decentralization: Redistribution and welfare implications," Economic Modelling, Elsevier, vol. 61(C), pages 224-234.

    More about this item

    Keywords

    Fiscal federalism; State capacity; Partial and full fiscal decentralization; Bailouts; Hard budget constraints;

    JEL classification:

    • H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism

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