Information transmission within federal fiscal architectures: Theory and evidence

Axel Dreher, Kai Gehring, Christos Kotsogiannis and Silvia Marchesi

No 11344, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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 policydecision 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: Delegation; Centralization; Communication; Fiscal decentralization; State and local government (search for similar items in EconPapers)
JEL-codes: C23 D82 D83 H7 H77 (search for similar items in EconPapers)
Date: 2016-06
New Economics Papers: this item is included in nep-pbe
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Related works:
Journal Article: Information transmission within federal fiscal architectures: theory and evidence (2018)
Working Paper: Information Transmission within Federal Fiscal Architectures: Theory and Evidence (2013)
Working Paper: Information Transmission within Federal Fiscal Architectures: Theory and Evidence (2013)
Working Paper: Information transmission within federal fiscal architectures: Theory and evidence (2013)
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