TY - UNPB

T1 - How Do Local Governments Decide on Public Policy in Fiscal Federalism?

T2 - Tax vs. Expenditure Optimization

AU - Köthenbürger, Marko

N1 - JEL classification: H7, H3, H1

PY - 2008

Y1 - 2008

N2 - 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 presumption, the paper shows that local governments may choose to optimize over expenditures. The result most notably prevails when federal policy subsidizes local fiscal effort. 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 behaviour in fiscal federalism.

AB - 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 presumption, the paper shows that local governments may choose to optimize over expenditures. The result most notably prevails when federal policy subsidizes local fiscal effort. 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 behaviour in fiscal federalism.

M3 - Working paper

SN - 16179595

BT - How Do Local Governments Decide on Public Policy in Fiscal Federalism?

CY - Munich

ER -