Information Transmission within Federal Fiscal Architectures: Theory and Evidence

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

See all articles by Axel Dreher

Axel Dreher

Heidelberg University

Kai Gehring

CESifo; University of Bern - Faculty of Economics and Social Sciences

Christos Kotsogiannis

University of Exeter

Silvia Marchesi

Università degli Studi di Milano-Bicocca - Department of Economics, Management and Statistics (DEMS); Università degli Studi di Milano-Bicocca - Center for European Studies (CefES); University of Milan - Centro Studi Luca d'Agliano (LdA)

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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

Heidelberg University ( email )

Grabengasse 1
Heidelberg, 69117
Germany

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

Kai Gehring

CESifo ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

University of Bern - Faculty of Economics and Social Sciences ( email )

United States

Christos Kotsogiannis

University of Exeter ( email )

Exeter EX4 4QX, Devon
United Kingdom

Silvia Marchesi (Contact Author)

Università degli Studi di Milano-Bicocca - Department of Economics, Management and Statistics (DEMS) ( email )

Piazza dell'Ateneo Nuovo, 1
Milano, 20126
Italy
+39 02 64483057 (Phone)

HOME PAGE: http://https://sites.google.com/site/ssilviamarchesi/home

Università degli Studi di Milano-Bicocca - Center for European Studies (CefES)

University of Milan - Centro Studi Luca d'Agliano (LdA)

Via P. Amedeo 34
Milano, Mi 20122
Italy

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