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A political economy theory of partial decentralization

William Hatfield, John and Padró i Miquel, Gerard (2012) A political economy theory of partial decentralization. Journal of the European Economic Association, 10 (3). pp. 605-633. ISSN 1542-4766

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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 chooses to use redistributive capital taxes to provide public goods. The expectation of high capital taxes, however, results in a small capital stock which lowers returns to redistribution. The median voter therefore wants to commit to a lower level of capital taxes. She does so by setting a partial degree of decentralization in the Constitution. The equilibrium degree of decentralization balances the positive effect of tax competition on capital taxes with the loss in redistribution that results. We show that the degree of decentralization is nonmonotonic 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: Article
Official URL: http://eu.wiley.com/WileyCDA/WileyTitle/productCd-...
Additional Information: © 2012 by the European Economic Association.
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 > H7 - State and Local Government; Intergovernmental Relations > H77 - Intergovernmental Relations; Federalism; Secession
Sets: Departments > Economics
Rights: http://www.lse.ac.uk/library/usingTheLibrary/academicSupport/OA/depositYourResearch.aspx
Date Deposited: 25 May 2012 16:01
URL: http://eprints.lse.ac.uk/43998/

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