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A political economy theory of partial decentralization

Hatfield, John William and Padró i Miquel, Gerard (2008) A political economy theory of partial decentralization. NBER working papers, 14628. NBER, Cambridge, USA.

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Abstract

We revisit the classic problem of tax competition in the context of federal nations, and derive a positive theory of partial decentralization. A capital poor median voter wants to use capital taxes to provide public goods. This results in redistributive public good provision. As a consequence, when all public goods are provided by the central government, capital taxes and public good provision are high. The expectation of high capital taxes, however, results in a small capital stock which lowers returns to redistribution. The median voter would therefore like to commit to a lower level of capital taxes. Decentralization provides such a commitment: local governments avoid using capital taxes due to the pressure of tax competition. We therefore obtain that the median voter favors a partial degree of decentralization. The equilibrium degree of decentralization is non-monotonic in inequality, increasing in the redistributive efficiency of public good provision, and decreasing in capital productivity. When public goods are heterogeneous in their capacity to transfer funds, all voters agree that goods with high redistributive capacity should be decentralized.

Item Type: Monograph (Working Paper)
Official URL: http://www.nber.org/papers/w14628
Additional Information: © 2008 by John William Hatfield and Gerard Padró i Miquel
Library of Congress subject classification: H Social Sciences > HB Economic Theory
Journal of Economic Literature Classification System: D - Microeconomics > D7 - Analysis of Collective Decision-Making > D72 - Economic Models of Political Processes: Rent-Seeking, Elections, Legislatures, and Voting Behavior
H - Public Economics > H1 - Structure and Scope of Government > H11 - Structure, Scope, and Performance of Government
H - Public Economics > H7 - State and Local Government; Intergovernmental Relations
H - Public Economics > H7 - State and Local Government; Intergovernmental Relations > H77 - Intergovernmental Relations; Federalism; Secession
Sets: Departments > Economics
Collections > Economists Online
Rights: http://www.lse.ac.uk/library/usingTheLibrary/academicSupport/OA/depositYourResearch.aspx
Identification Number: 14628
Date Deposited: 05 Apr 2011 09:38
URL: http://eprints.lse.ac.uk/33870/

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