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The Long and Winding Road Towards Fiscal Decentralization

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  • María Laura Alzúa

    (Centro de Estudios Distributivos, Laborales y Sociales, Facultad de Ciencias Económicas, Universidad Nacional de La Plata. CONICET)

  • Carolina López

    (Centro de Estudios Distributivos, Laborales y Sociales, Facultad de Ciencias Económicas, Universidad Nacional de La Plata. CONICET)

Abstract

This paper offers a theoretical explanation of the difficulties embodied in a process of fiscal decentralization from national to sub-national governments, as it is empirically observed in numerous developing countries. A game theoretic framework is used to show that the central government's lack of a credible commitment technology, used to penalize sub-national governments' fiscal profligacy, may give rise to an incomplete level of fiscal decentralization. Two different sets of equilibria are obtained. In one of them the central government will confer complete taxing autonomy to the sub-national governments, while in the other the government maintains the taxing authority since it is optimal to do so. In this case, the economy falls in an inefficient level of fiscal decentralization, as measured in terms of revenue collection.

Suggested Citation

  • María Laura Alzúa & Carolina López, 2014. "The Long and Winding Road Towards Fiscal Decentralization," Económica, Instituto de Investigaciones Económicas, Facultad de Ciencias Económicas, Universidad Nacional de La Plata, vol. 60, pages 3-43, January-D.
    • Handle: RePEc:akh:journl:591
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    References listed on IDEAS

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    More about this item

    Keywords

    Decentralization; default; taxes; sub-national governments.;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
    • H72 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Budget and Expenditures

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