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Public investment and budget rules for state vs. local governments

  • Marco Bassetto

Across different layers of the U.S. government there are surprisingly large differences in institutional provisions that impose fiscal discipline, such as constitutionally mandated deficit or debt limits, or specific tax bases. In this paper we develop a framework that can be used to quantitatively assess their costs and benefits. The model features both endogenous and exogenous mobility across jurisdictions, so we can evaluate whether the different degree of mobility at the local vs. national level can justify different institutional restrictions. In preliminary results, we show that pure land taxes have very beneficial incentive effects, but can only raise limited amounts of revenues. In contrast, under exogenous mobility, income taxes lead unambiguously to insufficient incentives to invest in public capital, unless the fiscal constraints explicitly favor such investment. This conclusion seems to hold even with the introduction of endogenous mobility, since adverse congestion effects from inefficient migration offset the beneficial impact of (partial) capitalization of future taxes into land prices.

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Paper provided by Federal Reserve Bank of Chicago in its series Working Paper Series with number WP-08-21.

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Date of creation: 2008
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Handle: RePEc:fip:fedhwp:wp-08-21
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  1. Paul Klein & Per Krusell & José-V�ctor R�os-Rull, 2008. "Time-Consistent Public Policy," Review of Economic Studies, Oxford University Press, vol. 75(3), pages 789-808.
  2. Schultz, C. & Sjostrom, T., 2000. "Local Public Goods, Debt and Migration," Papers 6-00-1, Pennsylvania State - Department of Economics.
  3. Marco Bassetto, 2002. "Equilibrium and government commitment," Working Papers 624, Federal Reserve Bank of Minneapolis.
  4. V. V. Chari & Patrick J Kehoe, 1998. "Sustainable Plans," Levine's Working Paper Archive 600, David K. Levine.
  5. Marco Battaglini, 2009. "On the Case for a Balanced Budget Amendment to the U.S. Constitution," 2009 Meeting Papers 131, Society for Economic Dynamics.
  6. Marco Bassetto & Thomas J Sargent, 2006. "Politics and Efficiency of Separating Capital and Ordinary Government Budgets," The Quarterly Journal of Economics, MIT Press, vol. 121(4), pages 1167-1210, November.
  7. Mieszkowski, Peter & Zodrow, George R, 1989. "Taxation and the Tiebout Model: The Differential Effects of Head Taxes, Taxes on Land Rents, and Property Taxes," Journal of Economic Literature, American Economic Association, vol. 27(3), pages 1098-1146, September.
  8. Matthias Doepke & Fabrizio Zilibotti, 2005. "The macroeconomics of child labor regulation," Staff Report 354, Federal Reserve Bank of Minneapolis.
  9. Jonah B. Gelbach, 2004. "Migration, the Life Cycle, and State Benefits: How Low Is the Bottom?," Journal of Political Economy, University of Chicago Press, vol. 112(5), pages 1091-1130, October.
  10. Hassler, John & Krusell, Per & Storesletten, Kjetil & Zilibotti, Fabrizio, 2005. "The dynamics of government," Journal of Monetary Economics, Elsevier, vol. 52(7), pages 1331-1358, October.
  11. Harald Uhlig, 2010. "A Law of Large Numbers for Large Economies," Levine's Working Paper Archive 2070, David K. Levine.
  12. Marina Azzimonti Renzo, 2004. "On the dynamic inefficiency of governments," 2004 Meeting Papers 228, Society for Economic Dynamics.
  13. John Conley & Antonio Rangel, 2001. "Intergenerational Fiscal Constitutions: How to Protect Future Generations Using Land Taxes and Federalism," Economics Bulletin, AccessEcon, vol. 28(17), pages A0.
  14. Jovanovic, Boyan & Rosenthal, Robert W., 1988. "Anonymous sequential games," Journal of Mathematical Economics, Elsevier, vol. 17(1), pages 77-87, February.
  15. Wildasin, David E. & Wilson, John Douglas, 1996. "Imperfect mobility and local government behaviour in an overlapping-generations model," Journal of Public Economics, Elsevier, vol. 60(2), pages 177-198, May.
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