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Fiscal Decentralization with a Redistribution Rule vs. Fiscal Centralization

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  • Zeynep Burcu BULUT-ÇEVİK

Abstract

This paper comparesthe case of fiscal decentralization (FD) with an intergovernmental transfer rule to the case of fiscal centralization (FC) from a theoretical perspective while focusing on Markovperfect Nash equilibrium by a continuum of citizens, local governments and a central government, which interact strategically. Simulation analysis shows that both the degree of spillovers and capital mobility play a role in the comparison of these two cases. In the presence of spillovers, the welfare of FD case is higher than the one of FC which is an unexpected result but points out the positive effect of a redistribution rule in FD model in terms of welfare. On the other hand, the growth rate of FD is lower than the FC case when there are spillovers. So, fiscal discipline, provided by the redistribution rule, prevents inefficiently low tax rates which pull down the growth rate. In addition, when spillovers are not allowed, capital mobility determines which case is superior.

Suggested Citation

  • Zeynep Burcu BULUT-ÇEVİK, 2020. "Fiscal Decentralization with a Redistribution Rule vs. Fiscal Centralization," Sosyoekonomi Journal, Sosyoekonomi Society, issue 28(44).
    • Handle: RePEc:sos:sosjrn:200206
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    More about this item

    Keywords

    Fiscal Decentralization; Fiscal Centralization; Intergovernmental Transfer/ Redistribution Rule; Welfare; Capital Mobility.;
    All these keywords.

    JEL classification:

    • H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models
    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games

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