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Information Transmission within Federal Fiscal Architectures: Theory and Evidence

59 Pages Posted: 13 Sep 2013 Last revised: 26 Feb 2016

Axel Dreher

University of Heidelberg

Kai Gehring

University of Zurich - Chair of Political Economy; University of Heidelberg

Christos Kotsogiannis

University of Exeter

Silvia Marchesi

Università degli Studi di Milano-Bicocca - Center for Interdisciplinary Studies in Economics, Psychology & Social Sciences (CISEPS); Università degli Studi di Milano-Bicocca - Department of Economics, Quantitative Methods and Business Strategies (DEMS)

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Date Written: October 1, 2015

Abstract

This paper explores the role of information transmission and misaligned interests across levels of government in explaining variation in the degree of decentralization across countries. Within a two-sided incomplete information principal-agent framework, it analyzes two alternative policy-decision schemes — ‘decentralization’ and ‘centralization’ — when ‘knowledge’ consists of unverifiable information and the quality of communication depends on the conflict of interests between the government levels. It is shown that, depending on which level of policy decision making controls the degree of decentralization, the extent of misaligned interests and the relative importance of local and central government knowledge affects the optimal choice of policy-decision schemes. The empirical analysis shows that countries’ choices depend on the relative importance of their private information and the results differ significantly between unitary and federal countries.

Keywords: delegation, centralization, communication, fiscal decentralization, state and local government

JEL Classification: H7, H77, D82, D83, C23

Suggested Citation

Dreher, Axel and Gehring, Kai and Kotsogiannis, Christos and Marchesi, Silvia, Information Transmission within Federal Fiscal Architectures: Theory and Evidence (October 1, 2015). University of Zurich CIS Working Paper No. 85. Available at SSRN: https://ssrn.com/abstract=2324694 or http://dx.doi.org/10.2139/ssrn.2324694

Axel Dreher

University of Heidelberg ( email )

Grabengasse 1
Heidelberg, 69117
Germany

HOME PAGE: http://www.axel-dreher.de

Kai Gehring

University of Zurich - Chair of Political Economy ( email )

Rämistrasse 71
Zürich, CH-8006
Switzerland
+4917620916056 (Phone)

HOME PAGE: http://www.kai-gehring.net

University of Heidelberg ( email )

Grabengasse 1
Heidelberg, 69117
Germany

Christos Kotsogiannis

University of Exeter ( email )

Exeter EX4 4QX, Devon
United Kingdom

Silvia Marchesi (Contact Author)

Università degli Studi di Milano-Bicocca - Center for Interdisciplinary Studies in Economics, Psychology & Social Sciences (CISEPS) ( email )

Piazza dell'Ateneo Nuovo, 1
Milano, 20126
Italy

Università degli Studi di Milano-Bicocca - Department of Economics, Quantitative Methods and Business Strategies (DEMS) ( email )

Piazza dell'Ateneo Nuovo, 1
Milan, 20126
Italy

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