Information Transmission within Federal Fiscal Architectures: Theory and Evidence

47 Pages Posted: 27 Jun 2016

See all articles by Axel Dreher

Axel Dreher

Heidelberg University

Kai Gehring

University of Zurich - Chair of Political Economy; Heidelberg University

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 Interdisciplinary Studies in Economics, Psychology & Social Sciences (CISEPS); University of Milan - Centro Studi Luca d'Agliano (LdA) ; Università degli Studi di Milano-Bicocca - Center for European Studies (CefES)

Multiple version iconThere are 3 versions of this paper

Date Written: June 2016

Abstract

This paper explores the role of information transmission and misaligned interests across levels of governments in explaining variation in the degree of decentralization across countries. We analyze two alternative policy-decision schemes - "decentralization" and "centralization" - within a two-sided incomplete information principal-agent framework. The quality of communication depends on the conflict of interests between the government levels and on which government level controls the degree of decentralization. We show that the extent of misaligned interests and the relative importance of local and central government knowledge affect the optimal choice of policy decision schemes. Our empirical analysis confirms that countries' choices depend on the relative importance of their private information. Importantly, results differ significantly between unitary and federal countries, in line with our theory.

Keywords: Centralization, communication, delegation, Fiscal Decentralization, state and local government

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

Suggested Citation

Dreher, Axel and Gehring, Kai and Kotsogiannis, Christos and Marchesi, Silvia, Information Transmission within Federal Fiscal Architectures: Theory and Evidence (June 2016). CEPR Discussion Paper No. DP11344. Available at SSRN: https://ssrn.com/abstract=2801005

Axel Dreher (Contact Author)

Heidelberg University ( 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

Heidelberg University ( email )

Grabengasse 1
Heidelberg, 69117
Germany

Christos Kotsogiannis

University of Exeter ( email )

Exeter EX4 4QX, Devon
United Kingdom

Silvia Marchesi

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 Interdisciplinary Studies in Economics, Psychology & Social Sciences (CISEPS) ( email )

Piazza dell'Ateneo Nuovo, 1
Milano, 20126
Italy

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

Via P. Amedeo 34
Milano, Mi 20122
Italy

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

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