Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/284173 
Year of Publication: 
2023
Series/Report no.: 
Cardiff Economics Working Papers No. E2023/11
Publisher: 
Cardiff University, Cardiff Business School, Cardiff
Abstract: 
We develop an endogenous growth model with public consumption and infrastructure services provided by two-tier governments. Growth performance and welfare implication are compared under the centralized and decentralized fiscal federal systems. In general, there is a trade-off between welfare and growth due to conflicts of interest and asymmetric information between central and local governments. By numerical simulations, we show that the optimal fiscal federalism should impose restrictions on expenditure-GDP ratio, rather than on expenditure-budget ratio or central-local expenditure ratio, because expenditure-GDP ratio can align the incentives of the two-tier governments. Furthermore, it is suggested that decentralized fiscal systems are generally superior to the centralized system because the efficiency loss overweighs the agency cost. The model is then applied to analyzing different growth experiences in the West and China by institutional and cultural differences.
Subjects: 
Fiscal Federalism
Decentralization
Economic Growth
Social Welfare
JEL: 
E61
E62
H1
H5
O41
R5
Document Type: 
Working Paper

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