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Human Fallibility, Complementarity, and Fiscal Decentralization

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  • YUKIHIRO NISHIMURA

Abstract

This paper examines economic growth properties under alternative fiscal organizations when a bureau's decisions are fallible. A country consists of J jurisdictions, which need a public service. In a centralized government, one authority decides on services in every jurisdiction. In a decentralized government, J authorities are in charge of each public service. An authority can have high ability or low ability, and an authority with high ability draws a good project with higher probability. We first show that the decentralized government provides the same average quality of public services, with lower variance, than does the centralized government. We then apply this result to an economic growth model where the value of the Solow residual is a constant elasticity of substitution (CES) function of public services. We show that there is a critical value of the degree of complementarity below which fiscal decentralization is more desirable than fiscal centralization for an expected economic growth, and the decentralized government has a lower variance of GDP growth.

Suggested Citation

  • Yukihiro Nishimura, 2006. "Human Fallibility, Complementarity, and Fiscal Decentralization," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 8(3), pages 487-501, August.
    • Handle: RePEc:bla:jpbect:v:8:y:2006:i:3:p:487-501
    DOI: 10.1111/j.1467-9779.2006.00274.x
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    References listed on IDEAS

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    1. Cornes,Richard & Sandler,Todd, 1996. "The Theory of Externalities, Public Goods, and Club Goods," Cambridge Books, Cambridge University Press, number 9780521477185, November.
    2. Ebel, Robert D. & Yilmaz, Serdar, 2002. "On the measurement and impact of fiscal decentralization," Policy Research Working Paper Series 2809, The World Bank.
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    Cited by:

    1. Nobuo Akai & Masayo Hosoi & Yukihiro Nishimura, 2009. "Fiscal Decentralization And Economic Volatility: Evidence From State‐Level Cross‐Section Data Of The Usa," The Japanese Economic Review, Japanese Economic Association, vol. 60(2), pages 223-235, June.
    2. Boriss Siliverstovs & Ulrich Thiessen & Caroline Elliott, 2015. "Incentive effects of fiscal federalism: Evidence for France," Cogent Economics & Finance, Taylor & Francis Journals, vol. 3(1), pages 1017949-101, December.
    3. Furceri, Davide & Sacchi, Agnese & Salotti, Simone, 2014. "Can fiscal decentralization alleviate government consumption volatility?," MPRA Paper 54513, University Library of Munich, Germany.
    4. Mario Jametti & Marcelin Joanis, 2020. "Elections and de facto expenditure decentralization in Canada," Economics of Governance, Springer, vol. 21(3), pages 275-297, September.
    5. Bo, Shiyu & Deng, Liuchun & Sun, Yufeng & Wang, Boqun, 2021. "Intergovernmental communication under decentralization," Journal of Economic Behavior & Organization, Elsevier, vol. 184(C), pages 606-652.
    6. Ignacio Lozano-Espitia & Juan Manuel Julio-Román, 2015. "Descentralización Fiscal y Crecimiento Económico: Evidencia Regional en Panel de Datos para Colombia," Borradores de Economia 865, Banco de la Republica de Colombia.
    7. Marcelin Joanis, 2008. "Intertwined Federalism: Accountability Problems under Partial Decentralization," Cahiers de recherche 08-22, Departement d'économique de l'École de gestion à l'Université de Sherbrooke.
    8. Joanis, Marcelin, 2014. "Shared accountability and partial decentralization in local public good provision," Journal of Development Economics, Elsevier, vol. 107(C), pages 28-37.
    9. Julio, Juan Manuel & Lozano, Ignacio, 2016. "Descentralización fiscal y crecimiento económico en Colombia: evidencia de datos de panel a nivel regional," Revista CEPAL, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL), August.
    10. Mario Jametti & Marcelin Joanis, 2010. "Determinants of fiscal decentralization: political economy aspects," Working Papers 2010/7, Institut d'Economia de Barcelona (IEB).
    11. Mario Jametti & Marcelin Joanis, 2010. "Determinants of fiscal decentralization: political economy aspects," Working Papers 2010/7, Institut d'Economia de Barcelona (IEB).
    12. Luis Ignacio Lozano-Espitia & Juan Manuel Julio-Román, 2015. "Fiscal Decentralization and Economic Growth: Evidence from Regional-Level Panel Data for Colombia," Borradores de Economia 12498, Banco de la Republica.
    13. Kimiko Terai, 2009. "Interregional Disparities in Productivity and the Choice of Fiscal Regime," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 11(3), pages 383-409, June.
    14. Nobuo Akai & Yukihiro Nishimura & Masayo Sakata, 2007. "Complementarity, fiscal decentralization and economic growth," Economics of Governance, Springer, vol. 8(4), pages 339-362, September.

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