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Dress-up contest: a dark side of fiscal decentralization

Author

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  • Ruixin Wang

    () (CentER, Tilburg University)

  • Wendun Wang

    () (Erasmus University Rotterdam)

Abstract

A `dress-up contest' is a competition for the best public image, and fiscal decentralisation can lead to such contests between local governments. In this paper we model the dress-up contest and investigate how it a effects social welfare. We show that yardstick competition (due to fiscal decentralisation) forces local governments to allocate more resources to more visible public goods (such as cash assistance) than less visible goods (such as vendor payments) and thus starts dress-up contests. The resulting distortion of resource allocation causes a structural bias in public expenditure and further hurts social welfare. To empirically verify our theoretical model, we employ U.S. state-level data from 1992 to 2008, and we estimate the panel data model using various econometric approaches. The empirical results provide strong evidence that fiscal decentralisation can lead to distortion in public expenditure arising from dress-up contests. We also find that this distortion increases the regional poverty rate.

Suggested Citation

  • Ruixin Wang & Wendun Wang, 2013. "Dress-up contest: a dark side of fiscal decentralization," Working Papers 2013/30, Institut d'Economia de Barcelona (IEB).
  • Handle: RePEc:ieb:wpaper:2013/6/doc2013-30
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    References listed on IDEAS

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    1. Bordignon, Massimo & Cerniglia, Floriana & Revelli, Federico, 2004. "Yardstick competition in intergovernmental relationships: theory and empirical predictions," Economics Letters, Elsevier, vol. 83(3), pages 325-333, June.
    2. Besley, Timothy & Case, Anne, 1995. "Incumbent Behavior: Vote-Seeking, Tax-Setting, and Yardstick Competition," American Economic Review, American Economic Association, vol. 85(1), pages 25-45, March.
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    5. Paul Belleflamme & Jean Hindriks, 2005. "Yardstick competition and political agency problems," Social Choice and Welfare, Springer;The Society for Social Choice and Welfare, vol. 24(1), pages 155-169, September.
    6. Janeba, Eckhard & Peters, Wolfgang, 1999. "Tax Evasion, Tax Competition and the Gains from Nondiscrimination: The Case of Interest Taxation in Europe," Economic Journal, Royal Economic Society, vol. 109(452), pages 93-101, January.
    7. Lockwood, Ben, 2005. "Fiscal Decentralization: A Political Economy Perspective," Economic Research Papers 269615, University of Warwick - Department of Economics.
    8. Mani, Anandi & Mukand, Sharun, 2007. "Democracy, visibility and public good provision," Journal of Development Economics, Elsevier, vol. 83(2), pages 506-529, July.
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    More about this item

    Keywords

    Fiscal decentralization; yardstick competition; dress-up contest; functional coefficient model;

    JEL classification:

    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
    • H75 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Government: Health, Education, and Welfare
    • H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism

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