commission on fiscal imbalance 合集

the decentralization theorem is based on the

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Unformatted text preview: welfare. The economic argument of efficiency stems from the fact that due to closeness to the citizens, local governments are able to meet different views and interests of people and allocate resources more efficiently than a central authority. However, efficiency aspect is not the only one in evaluating economic dimension of fiscal decentralization. Intergovernmental fiscal design has important implications on macroeconomic stability and equity. Before starting discussions on political dimension of fiscal decentralization, we discuss issues related to each aspect of the economic dimension of fiscal decentralization in turn. 2.1. Efficiency The fiscal federalism literature argues that there are efficiency gains from decentralization. According to Stigler (1957) a representative government works best when it is closer to the people. In his seminal work on the theory of public finance, Musgrave (1959) separates the functions of government into three: macroeconomic stabilization, income redistribution, and resource allocation. With respect to resource allocation function, Musgrave (1959) argues that policies of subnational branches of governments should be permitted to differ in order to reflect the preferences of their residents. Carrying Stigler's and Musgrave's arguments further, Oates (1972) formulated the decentralization theorem as "each public service should be provided by the jurisdiction having control over the minimum geographic area that would internalize benefits and costs of such provision." The decentralization theorem is based on the assumption that central government can only provide goods and services uniformly across jurisdictions. Therefore, according to the argument, there are potential efficiency gains from fiscal decentralization. Efficiency gains from decentralization can be allocative and managerial: (1) Efficient Allocation of Resources Decentralization will increase efficiency because local governments have better information about their residents' needs than the central government. Decisions about public expenditure that are made by a level of government that is closer and more responsive to a local constituency are more likely to reflect people's choices than decisions made by a remote central government. (2) Competition Among Local Governments If public goods are financed by local taxes that reflect costs, people will shop around for the community that best fits their preferences (Tiebout, 1956). In doing so, they will “vote with their feet.” Therefore fiscal decentralization will increase competition among the local governments for better use of public resources. Thus, by serving as a constraint on the behavior of the revenue-maximizing government, fiscal decentralization promotes interjurisdictional competition that limits excessive taxing power of the governments (Brennan and Buchanan, 1980). While there are potential gains from decentralization, the primary reasons for decentralization in most countries have been political, not economic. For example, in Latin America, decentralization has been an integral part of programs to restore and deepe...
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