Fiscal Reconstruction and Local Government Financing

Toshihiro Ihori () and Jun-ichi Itaya ()

International Tax and Public Finance, 2004, vol. 11, issue 1, 55-67

Abstract: This paper investigates the dynamic properties of intergovernmental financing during a fiscal reconstruction process by analyzing the dynamic game among local governments, which operates with soft budget constraints because of concessionary region-specific transfers from a central government. The existence of intergovernmental transfers induces the free-riding behavior of local governments, thereby bringing considerable deficits to the central government. Raising local and/or national taxes is desirable for fiscal reconstruction, but is unable to attain the Pareto-efficient fiscal reconstruction. Taxes on lobbying activities, combined with uniform transfers, induce earlier concession and can attain the Pareto-efficient outcome in the long run. Copyright Kluwer Academic Publishers 2004

Keywords: fiscal reconstruction; free riding; soft-budget constraint (search for similar items in EconPapers)
Date: 2004
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DOI: 10.1023/B:ITAX.0000004777.75405.8c

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