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http://ssrn.com/abstract=963475
 
 

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Public Budget Composition, Fiscal (De)Centralization, and Welfare


Calin Arcalean


ESADE Ramon Llull University - Department of Economics

Gerhard Glomm


Indiana University Bloomington - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Ioana C. Schiopu


ESADE Ramon Llull University - Department of Economics

Jens Suedekum


University of Duisburg-Essen; Institute for the Study of Labor (IZA)

February 15, 2007

CAEPR Working Paper No. 2007-003
IZA Discussion Paper No. 2626

Abstract:     
We present a dynamic two-region model with overlapping generations. There are two types of public expenditure, education and infrastructure funding, and governments decide optimally on budget size (tax rate) and its allocation across the two outlays. Productivity of government infrastructure spending can differ across regions. This assumption follows well established empirical evidence, and highlights regional heterogeneity in a previously unexplored dimension. We study the implications of three different fiscal regimes for capital accumulation and aggregate national welfare. Full centralization of revenue and expenditure decisions is the optimal fiscal arrangement for the country when infrastructure spending productivity is similar across regions. When regional differences exist but are not too large, the partial centralization regime is optimal where the federal government sets a common tax rate, but allows the regional governments to decide on the budget composition. Only when the differences are sufficiently large does full decentralization become the optimal regime. National steady state output is instead highest when the economy is decentralized. This result is consistent with the "Oates conjecture" that fiscal decentralization increases capital accumulation. However, in terms of welfare this result can be reversed.

Number of Pages in PDF File: 32

Keywords: fiscal federalism, capital accumulation, infrastructure, public education

JEL Classification: E6, H5, H7

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Date posted: February 15, 2007  

Suggested Citation

Arcalean, Calin and Glomm, Gerhard and Schiopu, Ioana C. and Suedekum, Jens, Public Budget Composition, Fiscal (De)Centralization, and Welfare (February 15, 2007). CAEPR Working Paper No. 2007-003; IZA Discussion Paper No. 2626. Available at SSRN: http://ssrn.com/abstract=963475

Contact Information

Calin Arcalean (Contact Author)
ESADE Ramon Llull University - Department of Economics ( email )
Av. de Pedralbes, 60-62
Barcelona, 08034
Spain
Gerhard Glomm
Indiana University Bloomington - Department of Economics ( email )
Wylie Hall
Bloomington, IN 47405-6620
United States
812-855-7256 (Phone)

CESifo (Center for Economic Studies and Ifo Institute)
Poschinger Str. 5
Munich, DE-81679
Germany
Ioana C. Schiopu
ESADE Ramon Llull University - Department of Economics ( email )
Av. de Pedralbes, 60-62
Barcelona, 08034
Spain
HOME PAGE: http://profesores.esade.edu/ioanaschiopu
Jens Südekum
University of Duisburg-Essen ( email )
Lotharstrasse 1
Duisburg, 47048
Germany
Institute for the Study of Labor (IZA)
P.O. Box 7240
Bonn, D-53072
Germany
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