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Partial Fiscal Decentralization and Public-Sector Heterogeneity: Theory and Evidence from Norway

  • Lars-Erik Borge
  • Jan K. Brueckner
  • Jorn Rattso

This paper provides an empirical test of a principal tenet of fiscal federalism: that spending discretion, when granted to localities, leads to public-sector heterogeneity, with public-good levels adjusting to suit local demands. The test is based on a simple model of partial fiscal decentralization, under which earmarking of central transfers for particular uses is eliminated, allowing funds to be spent according to local tastes. The model predicts that partial decen- tralization generates dispersion in the levels of public services as spending adjusts to local preferences. But the model also yields the more-general prediction that the characteristics of local jurisdictions should play a bigger role in determining the levels of public goods after a decentralization reform than before. Both predictions are confirmed by the paper’s empirical results, which show the effects of the 1986 Norwegian reform.

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File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2012/wp-cesifo-2012-10/cesifo1_wp3954.pdf
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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 3954.

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Date of creation: 2012
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Handle: RePEc:ces:ceswps:_3954
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  1. Charles M. Tiebout, 1956. "A Pure Theory of Local Expenditures," Journal of Political Economy, University of Chicago Press, vol. 64, pages 416.
  2. Robert Schwager, 1999. "Administrative Federalism and a Central Government with Regionally Based Preferences," International Tax and Public Finance, Springer, vol. 6(2), pages 165-189, May.
  3. Panizza, Ugo, 1999. "On the determinants of fiscal centralization: Theory and evidence," Journal of Public Economics, Elsevier, vol. 74(1), pages 97-139, October.
  4. Eberts, Randall W. & Gronberg, Timothy J., 1981. "Jurisdictional homogeneity and the Tiebout hypothesis," Journal of Urban Economics, Elsevier, vol. 10(2), pages 227-239, September.
  5. Mario Jametti & Marcelin Joanis, 2011. "Electoral Competition as a Determinant of Fiscal Decentralization," CESifo Working Paper Series 3574, CESifo Group Munich.
  6. Faguet, Jean-Paul, 2004. "Does decentralization increase government responsiveness to local needs?: Evidence from Bolivia," Journal of Public Economics, Elsevier, vol. 88(3-4), pages 867-893, March.
  7. Patrick Bayer & Christopher Timmins, 2003. "Estimating Equilibrium Models of Sorting across Locations," Working Papers 862, Economic Growth Center, Yale University.
  8. Hilary Sigman, 2007. "Decentralization and Environmental Quality: An International Analysis of Water Pollution," NBER Working Papers 13098, National Bureau of Economic Research, Inc.
  9. Ekaterina Zhuravskaya, 2000. "Incentives to provide local public goods: fiscal federalism, Russian style," Working Papers w0001, Center for Economic and Financial Research (CEFIR).
  10. Paul W. Rhode & Koleman S. Strumpf, 2003. "Assessing the Importance of Tiebout Sorting: Local Heterogeneity from 1850 to 1990," American Economic Review, American Economic Association, vol. 93(5), pages 1648-1677, December.
  11. Lars-Erik Borge & Jørn Rattsø, 2002. "Spending Growth With Vertical Fiscal Imbalance: Decentralized Government Spending In Norway, 1880-1990," Economics and Politics, Wiley Blackwell, vol. 14(3), pages 351-373, November.
  12. Borge, Lars-Erik & Rattso, Jorn, 1995. "Demographic shift, relative costs and the allocation of local public consumption in Norway," Regional Science and Urban Economics, Elsevier, vol. 25(6), pages 705-726, December.
  13. Arzaghi, Mohammad & Henderson, J. Vernon, 2005. "Why countries are fiscally decentralizing," Journal of Public Economics, Elsevier, vol. 89(7), pages 1157-1189, July.
  14. H. Spencer Banzhaf & Randall P. Walsh, 2008. "Do People Vote with Their Feet? An Empirical Test of Tiebout," American Economic Review, American Economic Association, vol. 98(3), pages 843-63, June.
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