IDEAS home Printed from https://ideas.repec.org/p/nbr/nberwo/3650.html
   My bibliography  Save this paper

Externalities, Incentives and Failure to Achieve National Objectives in Decentralized Economies

Author

Listed:
  • Joshua Aizenman
  • Peter Isard

Abstract

The purpose of this paper is to study why decentralized economies often fail to achieve national objective in the presence of externalities. The paper employs a two-period, open economy framework in which the central government allocates its tax revenues among a larger number of individual decision makers (e.g., provincial authorities or managers of state enterprises). The central government has only limited monitoring capacity, which gives individual decision makers the opportunity to commit to spend more than the incomes they are officially allocated. Our analysis suggests that adverse macroeconomic shocks reduce the likelihood that decentralized decision makers will behave in a manner that limits spending and inflation to national objectives. This is demonstrated for declines in the current or expected future levels of domestic output, for a rise in foreign interest rates, and for a reduction in the quantity of external credit. We next demonstrate that debt relief can promote a shift in the composition of spending toward the types of productive investments that generate positive externalities. This is not only because debt relief that expands the availability of current resources has positive direct income effects, but also because debt relief can promote a shift from opportunistic behavior to cooperation among individual decision makers.

Suggested Citation

  • Joshua Aizenman & Peter Isard, 1991. "Externalities, Incentives and Failure to Achieve National Objectives in Decentralized Economies," NBER Working Papers 3650, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:3650 Note: ITI IFM
    as

    Download full text from publisher

    File URL: http://www.nber.org/papers/w3650.pdf
    Download Restriction: no

    Other versions of this item:

    References listed on IDEAS

    as
    1. Claudio E. V. Borio, 1990. "Financial arrangements, 'soft' budget constraints and inflation: lessons from the Yugoslav experience," BIS Working Papers 15, Bank for International Settlements.
    2. Kornai, J, 1979. "Resource-Constrained versus Demand-Constrained Systems," Econometrica, Econometric Society, vol. 47(4), pages 801-819, July.
    3. Gyorgy Szapary & Steven V Dunaway & David Burton & Mario I. Bléjer, 1991. "China; Economic Reform and Macroeconomic Management," IMF Occasional Papers 76, International Monetary Fund.
    4. Krugman, Paul, 1988. "Financing vs. forgiving a debt overhang," Journal of Development Economics, Elsevier, vol. 29(3), pages 253-268, November.
    5. Michael Bruno, 1989. "Economic Analysis and the Political Economy of Policy Formation," NBER Working Papers 3183, National Bureau of Economic Research, Inc.
    6. Joshua Aizenman & Peter Isard, 1990. "Externalities, Incentives, and Economic Reforms," NBER Working Papers 3395, National Bureau of Economic Research, Inc.
    7. Cukierman, Alex & Edwards, Sebastian & Tabellini, Guido, 1992. "Seigniorage and Political Instability," American Economic Review, American Economic Association, vol. 82(3), pages 537-555, June.
    8. Aizenman, Joshua, 1989. "Country Risk, Incomplete Information and Taxes on International Borrowing," Economic Journal, Royal Economic Society, vol. 99(394), pages 147-161, March.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Bohn, Frank, 2013. "Grand corruption instead of commitment? Reconsidering time-inconsistency of monetary policy," Journal of International Money and Finance, Elsevier, vol. 32(C), pages 478-490.
    2. Sebastian M. Saiegh & Mariano Tommasi, 1999. "Why is Argentina’s Fiscal Federalism so Inefficient? Entering the Labyrinth," Journal of Applied Economics, Universidad del CEMA, vol. 2, pages 169-209, May.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:3650. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (). General contact details of provider: http://edirc.repec.org/data/nberrus.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.