Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/26099 
Year of Publication: 
2007
Series/Report no.: 
CESifo Working Paper No. 2054
Publisher: 
Center for Economic Studies and ifo Institute (CESifo), Munich
Abstract: 
Federal and state governments often differ in the capacity to pre-commit to expenditure and tax policy. Whether the implied sequence of public decisions has any efficiency implications is the subject of this paper. We resort to a setting which contrary to most of the literature does not exhibit a perfect tax-base overlap. We show that a federal government's pre-commitment capacity is welfare-improving. Efficiency, however, does not improve over all decision margins. The welfare-increasing policy entails a more distorted level of public consumption. Moreover, welfare may also improve if local governments are able to pre-commit towards the upper level. The rationale is that although federal transfers are formally unconditional they nevertheless entail a tax-price effect; thereby potentially counteracting incentives to engage in a “race to the bottom” in fiscal competition among local governments.
JEL: 
H71
H23
H10
Document Type: 
Working Paper
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