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The impact of economic openness on the vertical structure of the public sector

  • Antonio Sciala'

    ()

    (Universita' di Padova)

  • Paolo Liberati

    ()

    (Universita' di Roma)

The aim of this paper is to investigate the impact of economic openness on the vertical structure of the public sector within a country. To tackle this issue we set up a simple theoretical model of fiscal federalism, where both central and local public spending enter the objective functions of both a central government and an aggregate local public sector, accommodating a wide range of behaviours. The degree of economic openness is assumed to erode central tax revenues and through this channel to affect the size of central spending, the size of grants paid to local governments and the optimal amount of local public spending. Consequences on the degree of decentralization are investigated. The main findings are that for a large subset of parameters an increase in economic openness leads to: a) a lower level of central government expenditures; b) a lower level of general government expenditures; c) a higher level of local taxation; d) a higher degree of public sector decentralization.

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Paper provided by Dipartimento di Scienze Economiche "Marco Fanno" in its series "Marco Fanno" Working Papers with number 0085.

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Length: 26 pages
Date of creation: 2008
Date of revision:
Handle: RePEc:pad:wpaper:0085
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