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The Status of the Budget Constraint, Federalism and the Relative Size of Government: A Bureaucracy Approach

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  • Moesen, Wim
  • van Cauwenberge, Philippe

Abstract

We develop a model along the lines of Niskanen, articulating that under a soft government budget constraint the full production cost of the public good is not reflected in the tax price as perceived by the consumer-taxpayer-voter. Various proportions of non-tax financing and different degrees of voter myopia with respect to discounting the future tax liabilities are taken into account. It can be shown that both the actual level of public output and the amount of slack resources are lower under a hard budget constraint than under a soft budget regime. Lower levels of government typically operate under a hard budget constraint when compared with the federal level since they have only limited (public) borrowing opportunities and no access to money creation (seignorage). In a federalist setting more government decisions are taken under a hard budget constraint than in a unitary state. Hence one would expect that the overall size of government is relatively smaller in a structure with fiscal federalism. An empirical test for 19 OECD-countries (1990-92) seems to support this hypothesis. Copyright 2000 by Kluwer Academic Publishers

Suggested Citation

  • Moesen, Wim & van Cauwenberge, Philippe, 2000. "The Status of the Budget Constraint, Federalism and the Relative Size of Government: A Bureaucracy Approach," Public Choice, Springer, vol. 104(3-4), pages 207-224, September.
  • Handle: RePEc:kap:pubcho:v:104:y:2000:i:3-4:p:207-24
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    Citations

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    Cited by:

    1. Gebhard Kirchgassner, 2002. "The effects of fiscal institutions on public finance: a survey of the empirical evidence," Chapters,in: Political Economy and Public Finance, chapter 9 Edward Elgar Publishing.
    2. Vahabi, Mehrdad, 2003. "La contrainte budgétaire lâche et la théorie économique
      [Soft Budget Constraint and Economic Theory]
      ," MPRA Paper 17651, University Library of Munich, Germany.
    3. Kalb, Alexander, 2008. "The Impact of Intergovernmental Grants on Cost Efficiency: Theory and Evidence from German Municipalities," ZEW Discussion Papers 08-051, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
    4. John Ashworth & Emma Galli & Fabio Padovano, 2013. "Decentralization as a constraint to Leviathan: a panel cointegration analysis," Public Choice, Springer, vol. 156(3), pages 491-516, September.
    5. Lars Feld, 2014. "James Buchanan’s theory of federalism: from fiscal equity to the ideal political order," Constitutional Political Economy, Springer, vol. 25(3), pages 231-252, September.
    6. Haug, Peter, 2013. "Grant Dependence, Regulation and the Effects of Formula-based Grant Systems on German Local Governments: A Data Report for Saxony-Anhalt," IWH Discussion Papers 2/2013, Halle Institute for Economic Research (IWH).
    7. J. Kornai & E. Maskin & G. Roland., 2004. "Understanding the Soft Budget Constraint," VOPROSY ECONOMIKI, N.P. Redaktsiya zhurnala "Voprosy Economiki", vol. 11.
    8. Bischoff, Ivo & Bönisch, Peter & Haug, Peter & Illy, Annette, 2014. "Vertical Grants and Local Public Efficiency," IWH Discussion Papers 1/2013, Halle Institute for Economic Research (IWH).
    9. Vaubel, Roland, 2003. "Principal-Agent-Probleme in internationalen Organisationen," HWWA Discussion Papers 219, Hamburg Institute of International Economics (HWWA).
    10. Kornai, János & Maskin, Eric & Roland, Gérard, 2004. "A puha költségvetési korlát I
      [The soft budget constraint I]
      ," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(7), pages 608-624.
    11. Jorge Martinez-Vazquez & Santiago Lago-Peñas & Agnese Sacchi, 2017. "The Impact Of Fiscal Decentralization: A Survey," Journal of Economic Surveys, Wiley Blackwell, vol. 31(4), pages 1095-1129, September.
    12. repec:kap:porgrv:v:18:y:2018:i:1:d:10.1007_s11115-016-0358-y is not listed on IDEAS
    13. Changlin Luo, 2014. "Questioning the Soft Budget Constraint," Annals of Economics and Finance, Society for AEF, vol. 15(1), pages 403-412, May.
    14. Steven Deller & Judith I. Stallmann & Lindsay Amiel, 2012. "The Impact of State and Local Tax and Expenditure Limitations on State Economic Growth," Growth and Change, Wiley Blackwell, vol. 43(1), pages 56-84, March.
    15. Zhu, Z. & Krug, B., 2005. "Is China a Leviathan?," ERIM Report Series Research in Management ERS-2004-103-ORG, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus University Rotterdam.
    16. Roland Vaubel, 2006. "Principal-agent problems in international organizations," The Review of International Organizations, Springer, vol. 1(2), pages 125-138, June.
    17. Vaubel, Roland, 2003. "Principal-Agent-Probleme in Internationalen Organisationen," Discussion Paper Series 26392, Hamburg Institute of International Economics.

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