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Understanding Malaysian State Governments Fiscal Behavior: The Role of Intergovernmental Transfers

  • Abdul Jalil, Ahmad Zafarullah
  • Abdul Karim, Noor Al-Huda
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    As of late, several state governments in Malaysia have been identified as having serious difficulty in meeting their financial needs, to the extent of the government being qualified as on the verge of bankruptcy. One of the explanations put forward is that state governments have been acting irresponsibly in managing finances. Thus, the question that ensues is: why do state governments behave in such irresponsible manner fiscally and financially in the first place? In this paper, we relate the financial difficulties faced by these governments within the confines of the institutional and political environment currently in place within the country. We will examine one of the institutional features of the intergovernmental system in Malaysia – the intergovernmental grants systems. More precisely, there are two hypotheses that will be tested in this research.. First, federal transfers may stimulate more spending by state governments which leads them to increase spending beyond the means available to them. Second, financial problems may be the consequence of a state governments’ incapacity to utilize tax capacities to the fullest, which in turn may be explained by the disincentives effects that are embedded (whether intended or not) within the transfer system.

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    File URL: https://mpra.ub.uni-muenchen.de/25188/1/MPRA_paper_25188.pdf
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    Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 25188.

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    Date of creation: 2009
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    Publication status: Published in Chulalongkorn Journal of Economics 2.20(2009): pp. 113-141
    Handle: RePEc:pra:mprapa:25188
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    1. John M. Hartwick, 1980. "The Henry George Rule, Optimal Population, and Interregional Equity," Canadian Journal of Economics, Canadian Economics Association, vol. 13(4), pages 695-700, November.
    2. Logan, Robert R, 1986. "Fiscal Illusion and the Grantor Government," Journal of Political Economy, University of Chicago Press, vol. 94(6), pages 1304-18, December.
    3. Aragon, Fernando & Gayoso, Vilma, 2005. "Intergovernmental transfers and fiscal effort in Peruvian local governments," MPRA Paper 2108, University Library of Munich, Germany.
    4. Pablo Sanguinetti & Martin Besfamille, 2004. "Exerting local tax effort or lobbying for central transfers?: Evidence from Argentina," Econometric Society 2004 Latin American Meetings 249, Econometric Society.
    5. Quigley, John M & Rubinfeld, Daniel L, 1986. "Budget Reform and the Theory of Fiscal Federalism," American Economic Review, American Economic Association, vol. 76(2), pages 132-37, May.
    6. Martin McGuire, 1973. "Notes on Grants-in-Aid and Economic Interactions among Governments," Canadian Journal of Economics, Canadian Economics Association, vol. 6(2), pages 207-21, May.
    7. Meeusen, Wim & van den Broeck, Julien, 1977. "Efficiency Estimation from Cobb-Douglas Production Functions with Composed Error," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 18(2), pages 435-44, June.
    8. Aigner, Dennis & Lovell, C. A. Knox & Schmidt, Peter, 1977. "Formulation and estimation of stochastic frontier production function models," Journal of Econometrics, Elsevier, vol. 6(1), pages 21-37, July.
    9. Reifschneider, David & Stevenson, Rodney, 1991. "Systematic Departures from the Frontier: A Framework for the Analysis of Firm Inefficiency," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 32(3), pages 715-23, August.
    10. Moffitt, Robert A., 1984. "The effects of grants-in-aid on state and local expenditures : The case of AFDC," Journal of Public Economics, Elsevier, vol. 23(3), pages 279-305, April.
    11. Borcherding, Thomas E & Deacon, Robert T, 1972. "The Demand for the Services of Non-Federal Governments," American Economic Review, American Economic Association, vol. 62(5), pages 891-901, December.
    12. Cuthbertson, K & Foreman-Peck, J S & Gripaios, P, 1981. "A Model of Local Authority Fiscal Behaviour," Public Finance = Finances publiques, , vol. 36(2), pages 229-43.
    13. Kodde, David A & Palm, Franz C, 1987. "A Parametric Test of the Negativity of the Substitution Matrix," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 2(3), pages 227-35, July.
    14. Rajaraman, Indira & Vasishtha, Garima, 2000. "Impact of grants on tax effort of local government," Working Papers 00/1, National Institute of Public Finance and Policy.
    15. Edward M. Gramlich & Harvy Galper, 1973. "State and Local Fiscal Behavior and Federal Grant Policy," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 4(1), pages 15-66.
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