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Fiscal Reconstruction and Local Government Financing

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  • Toshihiro Ihori
  • Jun-Ichi Itaya

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

Suggested Citation

  • Toshihiro Ihori & Jun-Ichi Itaya, 2004. "Fiscal Reconstruction and Local Government Financing," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 11(1), pages 55-67, January.
    • Handle: RePEc:kap:itaxpf:v:11:y:2004:i:1:p:55-67
    DOI: 10.1023/B:ITAX.0000004777.75405.8c
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    References listed on IDEAS

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    1. Ihori, Toshihiro & Itaya, Jun-ichi, 2001. "A dynamic model of fiscal reconstruction," European Journal of Political Economy, Elsevier, vol. 17(4), pages 779-797, November.
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    Cited by:

    1. Toshihiro Ihori, 2014. "Commitment, Deficit Ceiling, and Fiscal Privilege," CIRJE F-Series CIRJE-F-920, CIRJE, Faculty of Economics, University of Tokyo.
    2. Toshihiro Ihori, 2013. "Fiscal Fluctuation Risks and Intergovernmental Functional Allocation," Public Policy Review, Policy Research Institute, Ministry of Finance Japan, vol. 9(1), pages 1-32, January.
    3. Toshihiro Ihori, 2015. "Flexibility of Deficit Ceiling and Income Fluctuation," Public Policy Review, Policy Research Institute, Ministry of Finance Japan, vol. 11(2), pages 231-246, March.

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