Information Transmission within Federal Fiscal Architectures: Theory and Evidence
47 Pages Posted: 27 Jun 2016
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Information Transmission within Federal Fiscal Architectures: Theory and Evidence
Information Transmission within Federal Fiscal Architectures: Theory and Evidence
Date Written: June 2016
Abstract
This paper explores the role of information transmission and misaligned interests across levels of governments in explaining variation in the degree of decentralization across countries. We analyze two alternative policy-decision schemes - "decentralization" and "centralization" - within a two-sided incomplete information principal-agent framework. The quality of communication depends on the conflict of interests between the government levels and on which government level controls the degree of decentralization. We show that the extent of misaligned interests and the relative importance of local and central government knowledge affect the optimal choice of policy decision schemes. Our empirical analysis confirms that countries' choices depend on the relative importance of their private information. Importantly, results differ significantly between unitary and federal countries, in line with our theory.
Keywords: Centralization, communication, delegation, Fiscal Decentralization, state and local government
JEL Classification: C23, D82, D83, H7, H77
Suggested Citation: Suggested Citation