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Decentralized government and regional income insurance

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  • Constance E. Smith

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Abstract

One advantage of a decentralized system of government is that it allows government expenditure and taxation to better suit local preferences for public goods. On the other hand, if income is uncertain, a centralized system that incorporates interregional transfers allows regions to share consumption risk associated with region-specific shocks. Previous studies have compared decentralized and centralized systems using single period models in which all shocks are effectively permanent. This paper shows that when output shocks are temporary, if local governments borrow in periods with negative shocks and save in periods with positive shocks, a decentralized regime can stabilize income as effectively as a centralized regime. When output shocks are both temporary and permanent, the tradeoff between decentralized and centralized regimes depends on the difference in preferences for the public good across regions, the probability that disturbances to output are temporary, and the degree to which shocks are correlated across regions. Copyright Springer-Verlag 2004

Suggested Citation

  • Constance E. Smith, 2004. "Decentralized government and regional income insurance," The Annals of Regional Science, Springer;Western Regional Science Association, vol. 38(1), pages 173-187, March.
  • Handle: RePEc:spr:anresc:v:38:y:2004:i:1:p:173-187
    DOI: 10.1007/s00168-003-0136-y
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    Cited by:

    1. Tomasz Skica & Jacek Rodzinka, 2012. "Preferences And The Level Of Satisfaction From The Provision Of Insurance Services In Activity Of The Lgus On A Municipal Level In Podkarpackie Voivodship," "e-Finanse", University of Information Technology and Management, Institute of Financial Research and Analysis, vol. 8(3), pages 76-84, October.

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