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Title:How do local governments decide on public policy in fiscal federalism?: tax vs. expenditure optimization PDF Logo
Authors:Köthenbürger, Marko
Issue Date:2008
Series/Report no.:CESifo working paper 2385
Abstract:Previous literature widely assumes that taxes are optimized in local public finance while expenditures adjust residually. This paper endogenizes the choice of the optimization variable. In particular, it analyzes how federal policy toward local governments influences the way local governments decide on public policy. Unlike the presumption, the paper shows that local governments may choose to optimize over expenditures. The result most notably prevails when federal policy subsidizes local fiscal effort. The results offer a new perspective of the efficiency implications of federal policy toward local governments and, thereby, enable a more precise characterization of local government behaviour in fiscal federalism.
Subjects:Tax vs expenditure optimization
federalism
endogenous commitment
fiscal incentives
policy interaction
JEL:H7
H3
H1
Document Type:Working Paper
Appears in Collections:CESifo Working Papers, CESifo Group Munich

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