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Central Control of Regional Budget: Theory with Applications to Russia

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  • John M. Litwack

Abstract

Motivated by the recent experience in the Russian Federation, this paper examines the implications of imposing central control on the budgetary activities of a subnational government. In a highly stylised multi-task principal-agent model (Holmstrom and Milgrom (1991)), a central government cannot directly monitor the informal budgetary operations of a regional administration, but seeks to improve fiscal policies by exerting control over a “formal” regional budget and imposing (limited) costs on informal behaviour. In the static case of the model, the control of subnational budgetary operations by a benevolent central government may increase social welfare, but at the expense of higher (implicit and explicit) taxation of economic organisations in the region, lower output, and a strong orientation of informal policies toward rent seeking activities. The additional imposition of costs on regions for conducting informal budgetary operations has multiple (indeterminate) effects in ... Motivé par l’expérience récente de la fédération de Russie, cette étude examine les conséquences d’un contrôle central imposé sur les activités budgétaires des administrations locales. Dans un modèle principal-agent multi fonction (Holmstrom and Milgrom (1991)), le gouvernement central ne peut pas observer les opérations budgétaires informelles d’une administration régionale, mais il cherche à améliorer les politiques budgétaires en faisant un effort de contrôle sur le budget régional “officiel” et en imposant des coûts (limités) sur des activités informelles. Dans le modèle statique, le contrôle des opérations budgétaires locales par un gouvernement central bienveillant pourrait augmenter le bien-être social, mais au prix d’une taxation plus forte (implicite et explicite) des organisations économiques de la région, d’une production plus faible, et d’une orientation marquée des politiques informelles vers la recherche de rentes. L’imposition supplémentaire de coûts sur les régions ...

Suggested Citation

  • John M. Litwack, 2001. "Central Control of Regional Budget: Theory with Applications to Russia," OECD Economics Department Working Papers 275, OECD Publishing.
    • Handle: RePEc:oec:ecoaaa:275-en
    DOI: 10.1787/560325048014
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    Cited by:

    1. Ulrich Thießen, 2004. "Fiscal Federalism in Transition: Evidence from Ukraine," Economic Change and Restructuring, Springer, vol. 37(1), pages 1-23, March.

    More about this item

    Keywords

    décentralisation fiscale; fiscal decentralisation; intergovernmental relations; relations intergouvernementales; Russian economy; économie russe;
    All these keywords.

    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • H11 - Public Economics - - Structure and Scope of Government - - - Structure and Scope of Government
    • H39 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Other
    • H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism

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