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Precommitment and State and Local Policy Coordination

  • William H. Hoyt

    (University of Kentucky)

  • Richard A. Jensen

    (University of Kentucky)

Local government tax and service policies, for reasons including tax competition, spillovers of service benefits, and a limited choice of tax instruments, may not be globally efficient. Policies used by state governments to remedy these inefficiencies include matching grants, mandates, and tax subsidies. We consider an additional strategy the state government may employ to influence local policies -- choosing or "precommitting" to its policies before the local governments choose their policies. We argue that the conditions necessary for the state government to credibly precommit to its policies with respect to local government policies do exist. The unlikelihood of the state government being able to alter its policies after local governments have chosen their policies reduces problems associated with time-inconsistency. We first derive the general conditions necessary for precommitment to improve social welfare. Essentially we find that precommitment can increase social welfare if the state government does not have "sufficient" policy instruments to eliminate any change in welfare in one locality from a change in another locality's government policies and if the state government's policies influence the local government policies that create the uncompensated externality. We then illustrate the conditions when precommitment can improve social welfare using two examples from the `tax competition' literature.

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Paper provided by EconWPA in its series Public Economics with number 9508001.

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Date of creation: 07 Aug 1995
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Handle: RePEc:wpa:wuwppe:9508001
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  1. V.V. Chari & Patrick J. Kehoe & Edward C. Prescott, 1988. "Time consistency and policy," Staff Report 115, Federal Reserve Bank of Minneapolis.
  2. Cubitt, Robin P., 1993. "Economic policy precommitment and social welfare," Journal of Public Economics, Elsevier, vol. 50(3), pages 455-455, March.
  3. Wilson, John D., 1986. "A theory of interregional tax competition," Journal of Urban Economics, Elsevier, vol. 19(3), pages 296-315, May.
  4. Tesfatsion, Leigh S., 1986. "Time Inconsistency of Benevolent Government Economies," Staff General Research Papers 11206, Iowa State University, Department of Economics.
  5. Hoyt, William H., 1991. "Property taxation, Nash equilibrium, and market power," Journal of Urban Economics, Elsevier, vol. 30(1), pages 123-131, July.
  6. Blackburn, Keith & Christensen, Michael, 1989. "Monetary Policy and Policy Credibility: Theories and Evidence," Journal of Economic Literature, American Economic Association, vol. 27(1), pages 1-45, March.
  7. Bucovetsky, S., 1991. "Asymmetric tax competition," Journal of Urban Economics, Elsevier, vol. 30(2), pages 167-181, September.
  8. Wildasin, David E., 1984. "The welfare effects of intergovernmental grants in an economy with distortionary local taxes : A simple general equilibrium analysis," Journal of Public Economics, Elsevier, vol. 25(1-2), pages 103-125, November.
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