Journal of Urban Economics65(2009)
279–293
Contents lists available at ScienceDirect
Journal of Urban Economics
sat/locate/jue
Second generationfiscal federalism:The implications offiscal incentives Barry R.Weingast1
Stanford University,Department of Political Science,Encina Hall,Stanford,CA,United States
a r t i c l e i n f o a
b s t r a
c t
Article history:
Received18January2007
Revid7November2008 Available online25December2008
JEL classification:
北京英语H77
H11
H71
R11
R58
Keywords:
Fiscal federalism
State and local taxation Intergovernmental relations Revenue First generationfiscal federalism(FGFF)studies the performance of decentralized systems under the assumption of benevolent social planners.Second generationfiscal federalism(SGFF)studies performance bad on thefiscal and political incentives facing subnational officials.The paper focus on three aspects of SGFF.First,it considers the design of intergovernmental transfers.While FGFF emphasizes correcting vertical and horizontal equity,SGFF emphasizes the importance offiscal incentives for producing local economic prosperity.SGFF extends FGFF approaches by showing how non-linear transfer systems can produce both equalization and high marginalfiscal incentives to produce local economic
growth.Second, the paper rais thefiscal incentive approach,showing how different tax systems produce differentfiscal incentives for political officials to choo policies.Third,the paper discuss the interaction of democracy andfiscal federalism.
©2008Elvier Inc.All rights rerved.
district[Second generationfiscal federalism reprents]a new litera-ture onfiscal federalism that examines the workings of dif-ferent political andfiscal institutions in a tting of imperfect information and control with a basic focus on the incentives that the institutions embody and the result behavior they in-duce from utility-maximizing participants(Oates,2005,p.356).
Muchfiscal analysis of developing countries is on the follow-ing pattern:the academic literature is drawn on to construct a modelfiscal system;the existing situation in a particular coun-try is examined to determine how it diverges from the model;
and afiscal reform is then propod to transform what is into what ought In contrast,my approach isfirst to study in detail exactly how the existing system works,and why it works that way,in order to have afirm basis for understanding what changes may be both desirable and feasible.My emphasis has thus always been more on what can be done than on what should be done(Bird,1992,
x,emphasis in original).
1.Introduction
对话玩具
Why do federal nations exhibit such widely different economic performance?Some are rich(Switzerland and the United States)
E-mail address:weingast@stanford.edu.
1Senior Fellow,Hoover Institution,and Ward C.Krebs Family Professor.while some are poorer(Argentina and Brazil);some exhibit fast-paced growth(modern China)while others little growth(Mexico). In this essay,I explore this issue by surveying the new literature on cond generationfiscal federalism(SGFF),which complements first generationfiscal federalism(FGFF).The distinction between FGFF and SGFF parallels that made by Musgrave(1959,p.4):
[Theories of Public Economy]can be approached in two ways.
First,we attempt to state the rules and principles that make for an efficient conduct of the In the cond approach,we attempt to develop a theory that permits us to explain why existing policies are pursued and to predict which policies will be pursued in the future.
太原电脑培训FGFF is largely normative and assumes that public decision-makers are benevolent maximizers of the social welfare(Musgrave, 1959;Oates,1972;Rubinfeld,1987).SGFF builds on FGFF but as-sumes that public officials have goals induced by political institu-tions that often diverge from maximizing citizen welfare(Oates, 2005;Garzarelli,2004;Qian and Weingast,1997;e also Brennan and Buchanan,1980;Salmon,1986;and Wickll,1967).As Hat-field(2006)puts it,“Economic policy is not decided by benevolent social planners,but by government officials,usually with at least one eye to their reelection prospects.”
The distinction should not be overdrawn–no clean demar-cation exists between the generations,and manyfirst generation works develop considerable positive implications.Nonetheless,the
0094-1190/$–e front matter©2008Elvier Inc.All rights rerved. doi:10.1016/j.jue.2008.12.005
280 B.R.Weingast/Journal of Urban Economics65(2009)279–293
distinction is important becau it emphasizes the extension of normativefiscal federalism to take systematic account of public official incentives.
SGFF models provide a range of new insights intofiscal federal-ism(Oates,2005).This approach also
provides new normative pre-scriptions for the design of federal systems,including how many of the prescriptions of FGFF should be adapted given more realistic political choice environments.SGFF explores how various institu-tions align–or fail to align–the incentives of political officials with tho of citizens.This approach is central to understanding differential federal performance.
In this essay,I survey a range of SGFF ideas and explore their implications for developing countries in the context of decentral-ization and democratic governance.I begin with the perspective of market-prerving federalism.By studying the conditions and incentives of subnational government authority and policymaking, this perspective provides a comparative theory of federal perfor-mance:federal systems that satisfy different combinations of the market-prerving federalism conditions differ in predictable ways. The comparative analysis helps explain why decentralized systems exhibit so much variance in behavior.This analysis allows us to study a range of“pathologies of federalism”–fiscal institutions that produce perver or market-distorting outcomes.
I next discuss SGFF implications for intergovernmental trans-fer systems.FGFF models emphasize the importance of transfers for mitigating vertical and horizontal imbalances.The SGFF ap-proach emphasizes the importance of incentives generated by lo-cal tax generation for fostering local economic prosperity.Subna-tional and urban governments are more likely to provide market-enhanci
ng public goods when they capture a large portion of the incread tax revenue generated by greater economic activity.SGFF approaches have significant implications for the design of transfer systems so that equalization goals can be achieved while providing public officials with incentives to foster thriving local economies.2012高考英语
Next,I turn to thefiscal incentives approach with long roots in the study offiscal federalism.2The idea is that,whatever their goals,public officials favor policies that relax their budget con-straint.Different systems of taxation and intergovernmental trans-fers therefore directly affect local governmental behavior and pol-icy choice.I study veral types offiscal incentives associated with intergovernmental transfer systems,including the design of mar-kets and corruption.
I also discuss the role of democracy.Democracy is a source of freedom and expression for citizens,and when it works well,it provides citizens a means to express choices and to hold pub-lic officials accountable.But democracy often fails in practice for developing countries.I show how thefiscal system affects the per-formance of democracy by investigating one source of failure of democracy called“tragic brilliance,”the idea that voting can create political dependence(Diaz-Cayeros et al.,2008).By makingfiscal transfers tofinance local public goods and rvices–such as wa-ter,road maintenance or schools–depend on whether voters in a locality support it,the incumbent
regime can force then to support it.Elections in the prence offiscal dependence and opportunism become a means of political control rather than of citizen expres-sion.Local governmentfiscal independence mitigates this perver effect.I end with a brief discussion of the differences between FGFF and SGFF approaches.
Before beginning,let me obrve that SGFF encompass a large and varied literature.At the most general level is Inman and Ru-binfeld’s call for a new political economy of federalism(Inman,
2Including Buchanan(1960),Brennan and Buchanan(1980),Glaer(1996),Oates (1972),Salmon(1986),Tiebout(1956),and Wallis et al.(1994).1988;Inman and Rubinfeld,1997b).3Others working in the con-text of developing countries,follow Bird’s(1992)point noted in the paper’s headnote.4A large body of work studies various forms of common pool problems,of which three stand out:the so-called “race to the bottom”5;problems with a soft budget constraints for subnational governments6;and common pool problems associated with centralized provision of local public goods.7Still other schol-ars call for understanding differences among federal systems in order to learn what institutions support market-prerving(Wein-gast,1995).8Beginning with Riker(1964),another strand in the literature emphasizes the political aspects of federal performance, particularly political parties.9Relatedly,scholars investigate the lf-enforcing rules nec
essary maintain federal stability.10
2.Market-prerving federalism and the comparative theory of decentralized governance
Local governments exist within a complex t of institutional arrangements,with political,legal-constitutional,and economic as-pects.This ction develops a framework for analyzing how dif-ferent institutional arrangements affect the performance of local governments.
Federalism,and decentralization more generally,encompass a wide range of different political–economic systems,not one, who political and economic properties vary widely(Shah,1997b; Watts,1999).As Litvak et al.(1998,p.vii)obrve,“decentraliza-tion is neither good nor bad for efficiency,equity,or macroeco-nomic stability;but rather that its effects depend on institution-specific design.”We therefore cannot speak of the tendencies of federalism per .Some federal systems promote macroeconomic stability and economic growth while others just the opposite.
Consider:For the last three centuries,the richest nation in the world has almost always been federal.The Dutch Republic from the late sixteenth through mid-venteenth centuries;England from the late venteenth or early eighteenth and mid-nineteenth centuries(a de facto though not de jure federal system);and the United States from the late nineteenth to the prent.Similarly, modern Chin
a,a de facto federal state,has experienced sustained rapid growth.India,having grown slowly for veral decades,has experienced high growth in the last.In contrast,the large Latin America federal states of Argentina,Brazil,and Mexico,have all fared much more poorly.How do we account for such large differ-ences in economic performance?
In this ction,I summarize a comparative theory of decen-tralized governance that explains the differential economic perfor-mance of various types of decentralization.This framework helps understand some of the institutions necessary to support decen-tralization that provides political officials with incentives to im-prove social welfare.
3Rodden(2005),Weingast(2005),and Winer and Hettich(2006)provide partial surveys.
4See also Bardhan(2002)and Litvack et al.(1998).
5Zodrow and Mieszkowski(1986),Wildasin(1991),and Wilson(1991).Revesz (1997)provides a survey and critique.A cloly related literature studies tax Wilson(1999)and Wilson and Wildasin(2004).
6Rodden et al.(2001)survey this large literature.
7Besley and Coate(2003),Inman and Rubinfeld(1997a),Knight(2004),Lockwood (2002),Sanguinetti(1994),Stein(1998),Weingast et al.(1981),and Winer(1980).
A large empirical literature provides evidence for this proposition,including Cohen and Noll(1998),Dillinger and Webb(1999),Inman(1988),and Poterba and von Hagen(1999).
8See also Montinola et al.(1995),Jin et al.(2005),McKinnon(1997),and Slider (1997).
9See Blanchard and Shleifer(2000),Chhibber and Kollman(2004),Filippov et al. (2003),Garman et al.(2000),and Jones et al.(2000).
10Bednar(2006),de Figueiredo and Weingast(2005)Filippov et al.(2003),Inman and Rubinfeld(2008),Stepan(2004b),and Treisman(1999).
B.R.Weingast/Journal of Urban Economics65(2009)279–293281
The comparative theory of federal performance begins with a t of conditions that differentiate federal systems.11All federal systems decentralize political authority,so a necessary condition for federalism is:
(F1)Hierarchy.A hierarchy of governments exists with each level having a delineated scope of authority.
Yet federal systems differ enormously in terms of the policy authority assigned to different levels of government.The following conditions characterize how federal states assign authority among national and subnational governments.
(F2)Subnational autonomy.Subnational governments have primary both local regulation of the economy and authority over public goods and rvice provision.
(F3)Common market.The national government provides for and polices a common market that allows factor and product mo-bility.
(F4)Hard budget constraints.All governments,especially subna-tional ones,face hard budget constraints.
(F5)Institutionalized authority.The allocation of political authority is institutionalized.
We can characterize different federal systems by which of con-ditions they satisfy,ranging from the hierarchy condition alone to allfive conditions.12高三英语教学反思
An ideal type of federalism,called market-prerving federal-ism,satisfies allfive conditions(Weingast,1995).The conditions make explicit some of the political assumptions implicit in FGFF. Indeed,many of the major results in this approach implicitly as-sume most or all the conditions,including Oates’s(1972)“de-centralization theorem,”Tiebout’s(1956)interjurisdictional compe-tition,and Musgrave’s(1959)solution to the assignment problem.
Scholars offiscal federalism have long argued that federalism places subnational governments in competition with one another (Tiebout,1956;Oates,1972;Brennan and Buchanan,1980).Com-petition gives subnational governments the incentive to foster local economic prosperity rather than costly market intervention,rvice to interest groups,and corruption.Competition among jurisdic-tions limits a subnational government’s ability to abu its policy authority,for example,by predating on investments or by granting privileged positions,such as monopolies or above market wages to government workers.Governments that fail to foster markets risk falling land values and the loss of capital and labor–and hence valuable tax revenue.Put another way,interjurisdictional compe-tition provides political officials with strongfiscal incentives to pursue policies that provide for a healthy local economy.
Effective inter-jurisdictional competition requires veral insti-tutional conditions.First,subnational go
vernments must have the authority to adapt policies to their circumstances;hence,the sub-national autonomy condition(F2).Consistent with the FGFF assign-ment principle,the governments must have considerable power to regulate local markets,to tailor the provision of local public goods and rvices to local circumstances,and to t tax rates,ide-ally to reflect local demand for public rvices(Musgrave,1959; Oates,1972).
Many federal systems restrict the policy authority and inde-pendence of subnational governments,compromising the benefits
11This ction draws on McKinnon(1997),Montinola et al.(1995)and Weingast (1995,2005).Inman and Rubinfeld(1997a)provide alternative ts of conditions for differentiating among federal systems.
12To make this discussion manageable,I ignore many subtleties and simply as-sume that each condition either holds or not.For further details,e Montinola et al.(1995)and Weingast(1995).of federalism.Examples include Mexico throughout much of the late twentieth century;India from independence through the mid-1990s;and Russia under Putin.
Second,effective competition among jurisdictions requires product and factor mobility across jurisdictional boundaries–hence the common market condition(F3).This condition has held for the Un
ited States since the inception of the Constitution.In-deed,rising trade barriers among the states was a Federalist argu-ment against the Articles of Confederation.In contrast,India allows internal trade barriers,and Russia restricts the movement of labor, capital and goods across regional borders in various ways.
The failure of the common market condition creates a pathol-ogy in which subnational government become a de facto“national government”within its jurisdiction.By reducing the penalties for costly market intervention,rent eking,and corruption,inter-nal trade barriers short-circuit interjurisdictional competition and hence federalism’s constraints on subnational policymaking.Be-cau many developing federal systems limit factor mobility,par-ticularly labor mobility,Bardhan(2002)questions whether the standard FGFF framework is relevant for many developing coun-tries.
Third,effective interjurisdictional competition requires a hard budget constraint(F4),which concerns both government borrow-ing andfiscal transfers among levels of governments.13This condi-tion requires that subnational governments bear the fullfinancial conquences of their policy decisions,so that they cannot spend beyond their means or endlessly bail out failing enterpris.A hard budget constraint also precludes the national government from bailing out subnational governments that go into deficit,whether through cash transfers or forgivable loans.
SGFF logic shows that a hard budget constraint provides local political officials with incentives for prudentfiscal management of their jurisdiction.As Shah(1997c)concludes,“to ensurefiscal dis-cipline,governments at all levels must be made to facefinancial conquences of their decisions.”In contrast,subnational govern-ments facing a soft budget constraint have incentives to spend beyond their means,pursue costly market intervention,provide costly benefits to interest groups,endlessly subsidize ailing en-terpris,and engage in corruption.The expectation of bailouts lowers thefinancial costs to the subnational governments(though not to the country)of the expenditures.Argentina in the1980s and Brazil in the1990s both experienced hyper-inflation as their provincial governments spent without limits,forcing the federal government to bail them out.
Thefinal condition–institutionalized authority(F5)–pro-vides the glue for the decentralized system.This condition re-quires that decentralization must not be under the discretionary or unilateral control of the national government(similarly,local decentralization within a region must not be solely at the dis-cretion of the regional government).Instead,a t of institutions must exist that prevent the national government from altering or undoing aspects of subnational autonomy.In the abnce of this condition,the national government can compromi subna-tional government autonomy and hence the benefits from com-petition among them.The Mexican president,for example,has historically had t
he power to remove governors(Carlos Salinas, President of Mexico from1988to1994,removed over half the governors during his six year term).This power dramatically re-duces the independence of the states becau the federal gov-ernment can threaten tho states which do not conform to the
石蜡的化学式13Several works provide excellent discussions of the HBC,especially the specific institutional necessary to implement it.See Dillinger and Webb(1999),Haggard and Webb(2004),McKinnon(1997),Rodden(2005),Rodden et al.(2001),and Wildasin (1997).
282 B.R.Weingast/Journal of Urban Economics65(2009)279–293
federal government’s policy wishes(Dillinger and Webb,1999; Garman et al.,2000).
The power of the central government to intervene in state af-fairs differs dramatically across federal systems.The Indian Con-stitution grants the central government relatively unconstrained power to take over states(although interventions by the courts have changed this in recent years),whereas the Spanish Constitu-tion places a complex t of constraints on the central governmen-t’s ability to take over a state(Stepan,2004a).
The institutionalized authority condition is easy to understand in the abstract,yet we know too little ab
out the mechanisms that make some federal systems succeed.A host of writers fol-low Riker(1964)and argue that the form of the party system is esntial to maintaining federalism.14Some party systems allow national elites to dominate the parties;others allow local elites to dominate;and still others allow for a balance of power among national and local elites.When national elites dominate parties, they are likely to force local leaders to accept institutional changes that compromi local government powers(as in Mexico under the PRI,1940–2000,India under the Congress Party,1950–1989, and Russia under Putin,2000-prent).In contrast,a party sys-tem dominated by local elites is more likely to force national elites to accept subnational government common pool behavior,such as bailing out subnational deficits(as in Brazil in the late1990s).Fi-nally,a party system balanced between national and local elites is more likely to support decentralization,as both local and national elites guard their own prerogatives(as in the United States).This perspective begs the issue of what creates different types of party systems.15
Market-prerving federalism limits the exerci of corruption, predation,and rent-eking by all levels of government.This form of decentralization is potentially important for developing coun-tries,where central government market-intervention frequently bestows many ctors with monopolies and various forms of pro-tection from competition.Market-prerving federalism limits th
e ability all levels of government to create monopolies and mas-sive state-owned enterpris who primary political purpo is to provide jobs,patronage,and other forms of inefficient eco-nomic intervention that plague developing countries(as Brennan and Buchanan,1980have obrved).A subnational government that eks to create monopolies,engage in extensive corruption,or arrange a privileged position for an interest group placesfirms in its jurisdiction at a disadvantage relative to competingfirms from less restrictive jurisdictions.
The comparative federalism framework also characterizes a t of pathologies of federalism,forms of market-distorting federalism that fail to provide incentives to foster and prerve markets(e Wibbels,2005,ch.2).To summarize,the abnce of one or more of the conditions(F2)–(F5)implies some form of inefficiency or pathology.
•The abnce of subnational policy authority(F2)inhibits the subnational competitive process and the ability of subnational governments to tailor policies to local conditions.
•The abnce of a common market(F3)directly hinders com-petition among jurisdictions,so that subnational governments
14See,for example,Filippov et al.(2003),Chhibber and Kollman(2004),Dillinger and Webb(1999),Enik
olopov and Zhuravskaya(2002),Garman et al.(2000),Rodden and Wibbles(2002),and Tommasi et al.(2000).
15Filippov et al.(2003),argue that the electoral system generates the party system (e also Cox,1997).More generally,Bednar(2006)and de Figueiredo and Weingast (2005)provide game theory models to study institutionalized autonomy,emphasiz-ing the importance of states and the center using trigger strategies to police one another.Madison referred to this trigger strategies in Federalist46,where he noted that potential abus by the center would sound the alarm among the states and cau them to react in concert to prevent center abu.
are more likely to engage in corruption,rent-eking,and inef-ficient resource allocation.Restrictions on factor mobility have
a similar effect.
•The abnce of a hard budget constraint(F4)allows subna-tional governments to live beyond their means so that they engage in more corruption,non-remunerative benefits to in-terest groups,and endless subsidies to inefficient enterpris.•Finally,the abnce of institutionalized authority(F5)allows the center to threaten subnational jurisdictions who ek pol-icy independence.
This brief analysis of federal pathologies suggests why many recent decentralization reforms fail.Becau decentralization so often does not satisfy one or veral of the market-enhancing conditions,it fails to provide subnational governments with incen-tives to foster markets.Indeed,too frequently in the developing context,decentralization involves very limited local government policy or tax independence.For example,Thomson(2006)ob-rves that much devolution of power in Africa often grants too little policy authority,involves too many unfunded mandates,and grants subnational governments only unproductive taxes and in-adequate and unpredictable intergovernmental transfers.Similarly, Wiesner(2003,pp.17–19)criticizes Bolivia’s decentralization be-cau it granted subnational governments“insufficient capacity (incentives)”or policy authority while allowing a soft budget con-straint bad on debt relief.
A related problem in the developing world is that decentraliza-tion in a truly predatory state is not likely to succeed.A central government that is not committed to decentralization has numer-ous ways to undermine subnational government performance,in-cluding inadequate revenue,constraints on subnational policymak-ing and unfunded mandates,and direct threats to political officials who deviate from the central government’s policies.
Let me conclude the discussion of comparative federalism with a contrast between post-reform Chin
a and India under the Congress party(1950–1990)that helps characterize the dif-ferential performance of the two federal systems.China is a market-prerving federal system embedded within an authori-tarian regimes(Jin et al.,2005;Montinola et al.,1995).Provinces (and lower governments,including townships and villages)have been the great engine of economic growth.Since1980,subna-tional governments have exercid wide ranging policy andfiscal independence,allowing them to innovate pro-market policies and provide market-enhancing public goods.China satisfies nearly all the conditions,with the possible exception of F5:Provinces have substantial policymaking authority(F2)and face a relatively hard budget constraint(F4),although there remain some trade barriers (F3)and the institutional curity of the system(F5)remains in some doubt(e discussion below).
In contrast,India’s sluggish performance from independence through the early-1990s reflected its centralized federal system, where the central government made most of the important pol-icy decisions(compromising F2)and impod some restrictions on the movement of goods across states(F3).States did face a hard budget constraint(F4).However,as discusd below,the center also had the ability to take over states,and it ud this discre-tion in part to undermine successful opposition parties.This polit-ical predation compromid state independence(both F2and F5). Centra
lized federalism,with too little state policy orfiscal inde-pendence,prevented states from innovating and fostering more market-enhancing local economies than that favored by the center. Importantly,as the center has looned the constraints on states, states have become more innovative,and India’s economic growth has improved significantly.
B.R.Weingast/Journal of Urban Economics65(2009)279–293283
3.Thefiscal incentives approach:taxation and the design of transfer systems
Thefiscal incentives approach emphasizes howfiscal institu-tions create incentives for subnational political officials that af-fect their policy choice and hence their jurisdiction’s performance. Whatever the goals of subnational officials,greater revenue relaxes their budget constraint,allowing them to further their goals.Polit-ical officials of all stripes are therefore biad toward policies that increa their revenue,allowing them tofinance more activities. This assumption differs from revenue maximization of leviathan (Brennan and Buchanan,1980).Leviathan is an extreme form of fiscal interest in which officials have no goals other than revenue maximization.Thefiscal incentives approach is more general,al-lowing political officials to goals other than revenue;but they all care about revenue becau it allows them to pursue their other goals.This obrvation implies that thefis
cal system directly influ-ences whether governments choo market-fostering or distorting policies.
Economists have long known about this principle,although they have not always studied it systematically.Tiebout(1956),for ex-ample,discusd the beneficial effects of the property tax for local government.Becau the value of public goods is capitalized into the value of local property,dependence on property taxation leads city managers to choo public goods that maximizing local prop-erty values.Moreover,city managers facing inten interjurisdic-tional competition have incentives to maximize property values as a means of inducing scarce capital and labor to locate and remain in their jurisdiction.Becau the taxes provide general incentives for local political officials to design policies that foster markets and attract capital and labor,property taxes are an important compo-nent of local governmentfiscal structure.16
3.1.Transfer systems,vertical and horizontal equalization,and incentives
Thefiscal incentives approach has significant implications for the design of transfer systems within federal systems.The FGFF rationale for intergovernmental emphasizes vertical and horizon-tal tax imbalances,spillovers of benefits,and forestalling costly tax competition(e Boadway and Flatters,1982;Boex and Martinez-Vazquez,2006;Oates,1972).Vertical imbalances ari when the cen
ter collects taxes more easily and at lower economic cost than subnational governments;it also aris when the central govern-ment preempts subnational government revenue sources(McLure, 1993).Efficiency considerations suggest that the center rai more taxes and then transfers funds to subnational government tofi-nance a portion of their expenditures.Horizontal imbalances ari becau regional economies differ in their income and hence in their ability to provide citizens with public goods and rvices. Here too transfers from the center can mitigate the imbalances by providing greater funds to poorer localities.
SGFF models emphasize the importance of revenue generation by subnational governments(Rodden,2003;Singh and Srinivasan, 2006;Careaga and Weingast,2003):subnational governments that rai a substantial portion of their own revenue tend to be more accountable to citizens,to provide market-enhancing public goods, and to be less corrupt.
Many FGFF scholars recognize this principle.Shah(1997a, 1997b)argues this point in a ries of influential papers.McLure
16Bahl and Linn(1992,especially chs.4–6)provide one of the most comprehen-sive discussions of the property tax in decentralized systems.Fischel(2001)and Glaer(1996)explain why property taxat
the realm of athena
ion leads local governments to focus on citizen welfare.See also Hoxby(1999).Nonetheless,the incentives are incomplete, as Epple and Romer(1991)have shown.(1998,p.1)obrves that“Subnational governments that lack inde-pendent sources of revenue can never truly enjoyfiscal autonomy; they may be—and probably are—under the thumb of the central government.”Similarly,Bahl and Linn(1992,p.428),in their au-thoritative study of localfiscal federalism in developing countries, obrve that“grants can make local governments less accountable for theirfiscal decisions(they may now increa spending without increasing taxes);hence there will be less incentive to improve the efficiency of local government operations and develop innovative methods of delivering public rvices.”
Despite the obrvations,FGFF analys of intergovernmen-tal transfers tend to focus on equity considerations rather than emphasizing the incentive effect of transfers on subnational gov-ernment policymaking or growth.As Singh and Srinivasan(2006, p.34)obrve:
The standard publicfinance question takes subnational jurisdic-tion’s income as given and looks at the incentive effects of tax assignments and transfers.The[SGFF]growth perspective ex-amines the effects of the tax and transfer system on incentives to increa ,through public or private investment).
Singh and Srinivasan further suggest that“the allocative effi-ciency of the tax system in a standard public economics n is of cond order importance relative tofiscal autonomy on the rev-enue side”(23).
英文圣诞贺卡The SGFF logic provides two related reasons for the conclu-sions.First,transfers that are negatively related or only weakly positively related to subnational income growth give local gov-ernments poorfiscal incentives to foster local economic growth. Second,such transfer systems induce greater corruption and rent-eking.This and the next subction studies thefirst issue,while the following studies the cond.
The attempt to correct vertical and horizontal imbalances in developing countries often means that the transfer systems ex-hibit poor responsiveness to localities that foster local economic growth.For example,the Finance Commission’s transfers of rev-enue to states in India reflect a ries of weights for different criteria:62.5percent is negatively related to a state’s income,so that poorer states receive greater funds;10percent on the basis of population;and the remainder somewhat evenly divided among state area,an index of infrastructure,tax effort,andfiscal disci-pline.17This type of intergovernmental transfer system provides poorfiscal incentives for subnational jurisdictions to foster local economic growth:most of an increa in local revenue goes to the center(
Singh and Srinivasan,2006).
To analyze the incentives,consider a transfer system,such as the Indian Finance Commission’s,t by formula that takes into account various economic and demographic characteristics,such as income and population.Suppo that the formula isfixed with ref-erence to a given year so that the center allocates revenue using the same proportions each year,with the only variable across years being the size of the revenue pool to be divided among subnational governments.
If there are n provinces,then the average province receives1/n of the total revenue pool,no matter how good or bad its policies. Let the total revenue pool be R,so that the average province re-ceives a share S=R/n of the total pool.Now let the province alter policies to foster local economic growth so that the revenue gener-ated from the province,r,increas.The average province’s share increas by∂S/∂r=1/n.In other words,the province receives 17Thefigures are for the11th Finance Commission.See Rao and Singh(2005,
ch.9,especially table9.3)and Singh and Srinivasan(2006).The Planning Commis-sion also transfers money to states bad on different criteria.
