Fiscal decentralization and political budget cycles
(2013) Journal of Public Economic Theory — Vol. 15, n° 6, p. 884-911 (2013)
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- Abstract
- We analyse a problem à la Rogoff where incumbents can distort fiscal policy can be centralized or decentralized. Our main focus is on how the equilibrium probability that fiscal policy is distorted in any region (the political budget cycle, PBC) differs across fiscal regimes. With centralization, there are generally two effects that change the probability of a PBC. One is the possibility of selective distortion: the incumbent can be reelected with the support of just a majority of regions. The other is a cost diversification effect, which is present unless costs are perfectly correlated across regions. Both these effects work in the same direction, with the general result that the PBC probability is lower under centralization when decentralization also involves PBC. Welfare analysis shows that voters tend to be better off when the PBC probability is lower, so voters prefer centralization when decentralization involves PBC. Our results are robust to a number of changes 2in the specification of the model.
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Citations
Gonzalez, P., Hindriks, J., & Porteiro, N. (2013). Fiscal decentralization and political budget cycles. Journal of Public Economic Theory, 15(6), 884-911. https://doi.org/10.1111/jpet.12039 (Original work published 2013)