How do local governments decide on public policy in fiscal federalism? Tax vs. expenditure optimization

Marko Koethenbuerger

No 2010/29, Working Papers from Institut d'Economia de Barcelona (IEB)

Abstract: Previous literature widely assumes that taxes are optimized in local public finance while expenditures adjust residually. This paper endogenizes the choice of the optimization variable. In particular, it analyzes how federal policy toward local governments influences the way local governments decide on public policy. Unlike the presumption, the paper shows that local governments may choose to optimize over expenditures. The result most notably prevails when federal policy subsidizes local taxation. The results offer a new perspective of the efficiency implications of federal policy toward local governments and, thereby, enable a more precise characterization of local government behaviour in fiscal federalism.

Keywords: Tax vs. expenditure optimization; federalism; endogenous commitment; fiscal incentives; policy interaction (search for similar items in EconPapers)
JEL-codes: H1 H3 H7 (search for similar items in EconPapers)
Pages: 22 pages
Date: 2010
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http://ieb.ub.edu/wp-content/uploads/2018/04/2010-IEB-WorkingPaper-29.pdf (application/pdf)

Related works:
Journal Article: How do local governments decide on public policy in fiscal federalism? Tax vs. expenditure optimization (2011)
Working Paper: How Do Local Governments Decide on Public Policy in Fiscal Federalism? Tax vs. Expenditure Optimization (2008)
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Persistent link: https://EconPapers.repec.org/RePEc:ieb:wpaper:doc2010-29

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