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Abstract:
According to the Leviathan-Model, fiscal federalism is seen as a binding constraint on a revenue-maximizing government. The competitive pressure of fiscal federalism is supposed to reduce public sector size as compared to unitary states. However, empirical results concerning the Leviathan hypothesis are mixed. This study uses a state and local-level panel data set of Swiss cantons from 1980 to 1998 to empirically analyze the effect of different federalist institutions on the size and structure of government revenue. Because of the considerable tax autonomy of sub-national Swiss governments, it is possible to investigate different mechanisms by which fiscal federalism may influence government size. The results indicate that tax exporting has a revenue expanding effect whereas tax competition favors a smaller size of government. Fragmentation has essentially no effect on the size of government revenue for Swiss cantons. The overall effect of revenue decentralization leads to lower tax revenue but higher user charges. Thus, revenue decentralization favors a smaller size of government revenue and shifts government revenue from taxes to user charges.

federalism, government revenue, tax competition, tax exporting.

Abstract:
There is a vast empirical literature investigating the relationship between government size and economic growth. But the empirical evidence of growth effects of public expenditure using cross-country regressions is still inconclusive. According to a number of authors this is not surprising since the negative relationship only applies for rich countries with a large public sector. Restricting their analysis on rich countries only they can show the predicted negative impact. Naturally, a selection of a sub-sample of rich countries is always somewhat arbitrary. Another possibility is to concentrate on governments within a rich country. However, only few studies investigate the effect of state and local spending on economic growth. This paper concentrates on the relationship between public expenditure and economic growth within a rich country using the full sample of state and local governments from Switzerland over the 1981-2001 period. The general finding is a fairly robust negative relationship between government size and economic growth. However, in contrast to public spending from operating budgets there is no significant impact on economic growth by expenditure from capital budgets.

Economic Growth, State and Local Expenditure

Abstract:
Previous theoretical and empirical research has shown that policymakers have an incentive to centralize government activities in order to weaken the competitive pressure of fiscal federalism. We propose and test a positive model of fiscal federalism in which centralization is less likely to occur where budget referendums are possible. The reason for this result is that budget referendums reduce the extent to which pro-centralization regions can commit to a low level of spending delegating the centralization choice to elected policymakers. In addition, it reduces the ability of higher level policy-makers to attract additional responsibilities in order to gain policy discretion. Empirical findings from a panel data analysis for Swiss cantons from 1980 to 1998 support this hypothesis.

Centralization, Fiscal Federalism, Budget Referendums

Abstract:
A common political claim is that decentralized governments undermine policy makers' ability to fight fiscal imbalance. This paper examines how different fiscal institutions influence the likelihood of a successful fiscal adjustment. Using a panel of the Swiss cantons from 1981 to 2001, we first analyze the episodes of tight fiscal policy and their macroeconomic consequences. Then, we empirically investigate the determinants of successful long-lasting deficit reductions. Contrary to the popular claim, we find that fiscal decentralization increases the probability of a successful fiscal consolidation. In addition, the results point to an important role of intergovernmental grants and of the circumstances, in particular the size of fiscal imbalance in the years before the consolidation, in determining a successful adjustment policy. Furthermore, coalition governments and large parliaments are less likely to implement successful fiscal stabilizations. Finally, there is some weak evidence that spending cuts are more promising in reaching a long-lasting fiscal adjustment than revenue increases.

fiscal adjustment, consolidation policy, fiscal decentralization, fiscal institutions

Abstract:
The fiscal commons problem is one of the most prominent explanations of excessive spending and indebtedness in political economics. The more fragmented a government, the higher its spending, deficits and debt. In this paper we investigate to what extent this problem can be mitigated by different fiscal or constitutional institutions. We distinguish between two variants of fragmented governments: cabinet size and coalition size. Theoretically, they both describe the degree to which the costs of spending decisions are internalized by individual decision-makers. In addition, we evaluate whether constitutional rules for executive and legislation as well as budget rules shape the size of government and how the different rules interact with fragmentation in determining government size. The empirical study of the role of fragmented governments for fiscal policy outcomes is based on a panel of the 26 Swiss cantons over the 1980-1998 period. The results indicate that the number of ministers in the cabinet is negatively associated with fiscal discipline. Furthermore, the fiscal referendum does effectively restrict the fiscal commons problem, but less successfully than the budget rule.

fragmentation, fiscal policy, referendums, legislative rules, budget rules

Abstract:
The paper compares decision-making on the centralisation of public goods provision in the presence of regional externalities under representative and direct democratic institutions. A model with two regions, two public goods and regional spillovers is developed in which uncertainty over the true preferences of candidates makes strategic delegation impossible. Instead, it is shown that the existence of rent extraction by delegates alone suffices to make cooperative centralisation more likely through representative democracy. In the non-cooperative case, the more extensive possibilities for institutional design under representative democracy increase the likelihood of centralisation. Direct democracy may thus be interpreted as a federalism-preserving institution.

centralisation, direct democracy, representative democracy, public good provision

Abstract:
We propose and test a positive model of fiscal federalism in which centralization is less likely to occur in jurisdictions with referendum decisions on policy centralization. Citizens choose centralization of public spending and revenue in order to internalize spillovers if individual preferences in two jurisdictions are sufficiently homogeneous. Under representative democracy, centralization is inefficiently high because representatives can extract political rents by policy centralization. Referendums thus restrict representatives' ability for rent extraction. An empirical analysis using a panel of Swiss cantons from 1980 to 1998 supports the hypothesis that centralization is less likely under referendum decision-making.

Centralization, Fiscal Federalism, Fiscal Referendums

Abstract:
Citizens are willing to abandon their short-term financial interest in free-riding considerably, if governments act in their interest, if procedures of the public decisions-making process are felt to be fair and if other fellow-citizens have to contribute also an adequate share to the community. In such a situation trustworthiness of a government and trust in a government is high. This paper provides empirical evidence that trust is crucial for fiscal performance using data for the full sample of Swiss cantons over the 1981-2001 period. In cantons with high levels of trust, the level of indebtedness is significantly lower. Trust supports fiscal discipline. In order to get a useful approximation for mutual trust among citizens and between citizens and their representatives, we use information from direct voter participation on political issues (initiatives and public referenda) held in Swiss state (cantonal) governments. Electoral support of government proposals reveals an important aspect of trust in a real world setting. Hence, our trust variable measures the behavior at the ballots thereby reducing possible subjective biases derived from surveys and questionnaires.

Trust, Social capital, Fiscal performance, Indebtedness

Abstract:
Books reviewed in this article:

S. N. Afriat - The Market. Equilibrium, Stability, Mythology.

Hazel Bateman, Geoffrey Kingston and John Piggott - Forced Saving: Mandating Private Retirement Incomes.

Jagdish Bhagwati (ed.) - Going Alone - The Case for Relaxed Reciprocity in Freeing Trade.

Boeri Tito, Axel Borsch-Supan, Agar Brugiavini, Richard Disney, Arie Kapteyn and Franco Peracchi (eds.) - Pensions: More Information, Less Ideology - Assessing the Long-term Sustainability of European Pension Systems: Data Requirements, Analysis and Evaluations.

Alvaro Cencini - Monetary Macroeconomics. A New Approach.

Bernard Dafflon (ed.) - Local Public Finance in Europe: Balancing the Budget and Controlling Debt.

Geoffrey M. Hodgson - How Economics Forgot History. The Problem of Historical Specificity in Social Science.

Douglas A. Irwin - Free Trade Under Fire.

Daniel B. Litvin - Empires of Profit.

Mark J. Roe - Political Determinants of Corporate Governance. Political Context, Corporate Impact.

Horst Siebert (ed.) - Economic Policy Issues of the New Economy.

Paul J. J. Welfens - Interneteconomics.net.

Joachim Zweynert - Eine Geschichte des Okonomischen Denkens in Russland. 1805-1905.

Abstract:
This paper explores the role of political stability on fiscal policy choices in a time-series analysis over 158 years on the Swiss federal level. We argue that the fiscal-commons problem of public finances is affected by the time-horizon of a finance minister. Arguably, the incentives for an incumbent to maintain a good reputation with sound policy decisions are stronger the longer the time-horizon of a respective term. In addition, a finance minister who succeeds to stay a long time in office normally enjoys a politically powerful position towards the parliament, the administration and the interest groups to influence policy decisions. In contrast, frequent government turnover weakens the position of the finance minister.

political stability, fiscal policy, constitutional changes

Abstract:
In this paper, we provide empirical evidence for the influence of income taxes on the choice of residence of taxpayers at the local level. The fact that Swiss communities can individually set tax multipliers thereby shifting the progressive tax scheme which is fixed at the cantonal (state) level enables us to study the effect of differences in income taxation on individuals’ choice of location within an economically and culturally homogeneous region. Using panel IV regressions covering the years 1991-2003 and 171 communities in the Swiss canton of Zurich and spatial error regressions for the 171 communities in 2003, we find substantial evidence for income sorting.

tax competition, fiscal federalism, income segregation, income tax