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 usual presumption, the paper shows that local governments may choose to
optimize over expenditures. The result holds when federal policy subsidizes local taxation. 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 behavior in fiscal federalism.
optimize over expenditures. The result holds when federal policy subsidizes local taxation. 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 behavior in fiscal federalism.
| Original language | English |
|---|---|
| Journal | Journal of Public Economics |
| Volume | 95 |
| Issue number | 11-12 |
| Pages (from-to) | 1516-1522 |
| Number of pages | 7 |
| ISSN | 0047-2727 |
| DOIs | |
| Publication status | Published - Dec 2011 |
Keywords
- Faculty of Social Sciences
- fiscal federalism
- fiscal policy