Old and New Theories of Fiscal Federalism, Organizational Design Problems, and Tiebout

This work is a contribution to the Second Generation Theory (SGT) of fiscal federalism that studies fiscal federalism through contemporary economic and industrial organization theory. First, it establishes context by introducing the two classic motivations in support of federalism, namely, incentives and knowledge. Second, it succinctly discusses the incentive-based organizational approach of the SGT. Third, it shows that the Tiebout model already embeds an organizational approach, which instead rests on a knowledge motivation. The underlying theme is that the SGT should include both the incentive and knowledge motivations for fiscal decentralization.Economic organization, Incentives, Knowledge, Second Generation Theory of fiscal federalism.

Theoretical Analysis of the Fiscal Federalism

There is no complete overview of the sciences literature of the fiscal decentralization and economics of federalism and, even though scholarly interest in the topic has been increasing significantly over recent years. The fiscal federalism and decentralization sciences literature is grouped into two main groups: the first generation of theory and the second generation of theory. This research aim - critically analyse the fiscal federalism first and second generation theories. This article offers a critical and in-depth review and evaluation of the important elements of current knowledge and theoretical development of fiscal federalism and decentralization

Cognition, Incentives, and Public Governance:Laboratory Federalism from the Organizational Viewpoint

The Second Generation Theory (SGT) of fiscal federalism, which draws upon contemporary economic and industrial organization theory, hitherto focuses only on the negative benefits of public decentralization: the potentially superior ability to align perverse incentives vis-à-vis the centralized governance alternative. The SGT neglects the positive benefits of decentralization (mistake-ridden learning, flexibility, and option discovery), although the limitations of organization theory do not justify such neglect. By likening intergovernmental grants to incomplete contracts, this work shows that the SGT can include the laboratory nature of decentralization.Experimentation, incomplete contracts, intergovernmental grants, learning, Second Generation Theory of fiscal federalism.

Theory of Fiscal Federalism: An Analysis

The recent scholarship has made distinction between two generation of literature in fiscal federalism. The study has critically analysed the first generation theory and second generation theory of fiscal federalism. Though the later approaches the problem of fiscal federalism from different perspective, it does not challenge but complements the former. The paper argues that second generation theory is an ongoing effort to build a theory in response to fiscal challenges facing a number of countries. In brief, it is aimed at explaining present-day institutional arrangements which can no longer be adequately explained by employing the first generation theory

Old and new theories of fiscal federalism, organizational design problems, and Tiebout

This work intends to contribute to the Second Generation Theory (SGT) of fiscal federalism that studies fiscal federalism through contemporary economic and industrial organization theory. First, it establishes context by introducing the two classic motivations in support of federalism, namely, incentives and knowledge. Second, it succinctly discusses the incentive-based organizational approach of the SGT. Third, it shows that the Tiebout model already embeds an organizational approach, which instead rests on a knowledge motivation

Getting Good Outcomes from Sub-National Governments: A Case Study on Indonesian Fiscal Decentralisation

This thesis assesses Indonesia’s fiscal decentralisation policy from 2001 to 2018 and in particular its attempts at ensuring local government performance. These employed both methods suggested in the ‘second generation’ theory of fiscal federalism: constraints and incentives. The asymmetric approach to fiscal decentralisation policy is suggested as an alternative in accommodating diverse situations among local governments

Cognition, incentives, and public governance: Laboratory federalism from the organizational viewpoint

The second-generation theory (SGT) of fiscal federalism, which draws upon contemporary economic and industrial organization theory, hitherto focuses only on the negative benefits of public decentralization: the potentially superior ability to align perverse incentives vis-à-vis the centralized governance alternative. The SGT neglects the positive benefits of decentralization (mistake-ridden learning, flexibility, and option discovery), although the limitations of organization theory do not justify such neglect. By likening intergovernmental grants to incomplete contracts, this work shows that the SGT can include the laboratory nature of decentralization

Government Decentralization as a Commitment

In the past several decades, many countries, among them non-democratic, chose to decentralize their governments. Building on insights provided by the second generation wave of research on fiscal federalism, this paper proposes a unified model to account for this. The idea is that decentralization serves as a commitment device to ensure that ex post chose policies will reflect regional preferences, thereby boosting individual productive effort incentives. This theory may explain the decentralization process in China in 1980-1990s, as well as the fact that government decentralization is generally more prevalent in democracies

A descentralização e as teorias do Federalismo Fiscal

ABSTRACT This article presents the evolution on the conceptions of mainstream Fiscal Federalism, identifying its key concepts and approaches, with an emphasis on the concept of decentralization and the notions of accountability and coordination. It addresses the so-called First-Generation Theory of Fiscal Federalism - or the traditional view of fiscal federalism - which defines fiscal decentralization as its main object. The article then moves on to present the so-called Second-Generation Theory of Fiscal Federalism, highlighting the qualifications that are promoted in the concept of decentralization, under the influence of Public Choice and the New Institutional Economics. These qualifications relate, respectively, to the notions of accountability and coordination. Finally, the article identifies which elements should be preserved in the aformentioned views, and it also points out a few imperative aspects in order to give the first step into a discussion about a more robust theoretical foundation focused on the analysis of subnational governments in Brazil. Key words Federalism; subnational governments; descentralization. Classificação JEL : H77, H71, H72. Artigo recebido em jan. 2010 e aceito para publicação em dez. 2010.ENDEREÇO PARA ENVIO DE PUBLICAÇÃO:RESUMO Este artigo apresenta a evolução das concepções de Federalismo Fiscal do mainstream, identificando seus principais conceitos e enfoques, com destaque para o conceito de descentralização e as noções de accountability e coordenação. Aborda as chamadas “Teorias de Federalismo Fiscal de Primeira Geração”, ou a visão tradicional de Federalismo Fiscal, que define a descentralização fiscal como seu principal objeto. Segue apresentando as chamadas “Teorias de Federalismo Fiscal de Segunda Geração”, nesta última destacando as qualificações promovidas no conceito de descentralização, sob a influência da Escolha Pública e da Nova Economia Institucional. Tais qualificações dizem respeito, respectivamente, às noções de accountability e coordenação. Finaliza identificando quais elementos devem ser preservados nessas visões, bem como apontando alguns aspectos críticos preliminares no sentido de dar um primeiro passo na discussão acerca de uma base teórica mais robusta, voltada para a análise dos governos subnacionais no Brasil. Palavras-chave Federalismo; governos subnacionais; descentralização

Free-riding or Internalizing? An Opportunistic View on Decentralization versus Centralization

The aim of the paper is to analyze a model of local public good provision with positive interjurisdictional spillovers comparing decentralized and centralized system. As in the recent Second Generation Theory (SGT) of fiscal federalism (Seabright 1996; Lockwood 2002, 2006; Besley and Coate 2003; Weingast 2009), we also adopt a political economy approach, assuming different behaviours of political leaders (Leviathan and non-Leviathan). The main contribution of the paper is to consider two relevant aspects neglected by the political economy models: the size of local jurisdictions and the explicit definition of the rent-seeking behaviour. Moreover, modelling interregional externalities as a mechanism contributing to lowering the production cost of the public good in each region, a different trade-off - from the traditional and new theory of fiscal federalism - is proposed in order to compare decentralized versus centralized solution: the gains from internalizing externalities and the losses of freeriding advantages, which may differ with regional size and preferences for the public good. Given this general framework, the convenience of decentralization versus centralization mainly depends on the interaction among these factors: i) the free-riding gains exploiting positive externalities; ii) the gains of internalizing externalities; iii) the degree of preferences heterogeneity; iv) the implicit transfers (“cross subsidization”) across different regions. To summarize, from a positive viewpoint, decentralization should not be necessarily pursued only in the absence of externalities, but also with high spillovers. The key insight of this result is represented by different size of regions, which may determine an asymmetry among citizens’ responses concerning the best institutional setting.decentralization, spillovers, free-riding, rent-seeking behaviour, local public goods