How Do Local Governments Decide on Public Policy in Fiscal Federalism? Tax vs. Expenditure Optimization

Marko Köthenbürger
Authors registered in the RePEc Author Service: Marko Koethenbuerger

No 2385, CESifo Working Paper Series from CESifo

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 fiscal effort. 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: H10 H30 H70 (search for similar items in EconPapers)
Date: 2008
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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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 (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_2385

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