Do interregional transfers improve the economic performance of poor regions? The case of Spain

The 17 regional governments of Spain receive grants from both the central government and the European Union. The grants are generally redistributive and are intended to stimulate economic activity in the poorer regions. We evaluate the effectiveness of the grants by comparing the economic performance of the regions before and after the implementation of the grant programs using a differences--in-- differences approach. We find that these policies have not been effective at stimulating private investment or improving the overall economies of the poorer regions.Regional grants and economic development

Fiscal decentralization in Spain: An asymmetric transition to democracy

Asymmetric fiscal decentralization, by which we mean different fiscal arrangements between the central government and different groups of, or individual, lower-level governments, may be justified from an economic efficiency perspective. As argued by Tiebout (1956), Oates (1972) and others, a decentralized system of regional and local governments is better able to accommodate differences in tastes for public goods and services. This efficiency argument calls for decentralization of fiscal authority to regional and local governments, but not necessarily asymmetric decentralization. However, when the differences in tastes for public goods and services arise out of differences in history, culture and language across regions of a country, asymmetric treatment may be justified. History, culture and language may influence how a group of people (a region) views autonomy, independence and fiscal authority. Some regions may have had experience with autonomous government in the past, they may have a culture that is strongly reliant upon (or leery of) the central government, or they may be fearful of losing their separate languages if they do not have special arrangements. To accommodate differences in taste for independence, autonomy, and fiscal authority, it may be necessary to have different fiscal arrangements between the central government and the different regions comprising the country.Fiscal decentralization, autonomous communities, asymmetric devolution, Spanish regions, fiscal imbalance

Tax incentives and the city

It is difficult to justify tax incentives within the existing economics literature on tax competition. We develop a model in which communities are interested in attracting firms not only for their own capital but also for the “concentration externalities,” a form of agglomeration economies, their location bestows on existing firms. We find that it is efficient in this case for communities to offer tax incentives, defined as a tax rate below the benefit tax level, to firms. We present the recent relocation of the Boeing Corporation's headquarters from Seattle to Chicago as a case study.Tax incentives, concentration externalities, agglomeration economies, tax competition, benefit tax

Why do differences in the degree of fiscal decentralization endure?

A notable difference between the U.S. and many countries in Europe is in the degree of fiscal decentralization. Regional (and local) governments in the U.S. have significant autonomy in setting their own taxes and determining how to spend their revenues. This is not true of their counterparts in Spain, France, the United Kingdom, Czech Republic and many other European countries. In recent years, many countries formerly subject to dictatorships or communism have been considering decentralizing fiscal responsibility to sub-national governments as part of the process of democratization (see Bird and Ebel, forthcoming). Yet, much of Europe remains immune to adopting effective decentralization in which sub-national units have true taxing authority.Fiscal decentralization, regional solidarity, efficiency, preferences for equality

Tobin meets Oates: Solidarity and the optimal fiscal federal structure

We explore the implications for the optimal degree of fiscal decentralization when people’s preferences for goods and services, which classic treatments of fiscal federalism (Oates, 1972) place in the purview of local governments, exhibit specific egalitarianism (Tobin, 1970), or solidarity. We find that a system in which the central government provides a common minimum level of the publicly provided good, and local governments are allowed to use their own resources to provide an even higher local level, performs better from an efficiency perspective relative to all other systems analyzed for a relevant range of preferences over solidarity.fiscal decentralization, specific egalitarianism, solidarity, externalities.

Why do differences in the degree of fiscal decentralization endure?

Differences in the degree of fiscal decentralization observed between the U.S. and many countries in Europe cannot be explained within the standard theory of fiscal decentralization. By introducing preferences for solidarity - equality in the provision of public goods and services across regions - we show that different decentralization schemes can coexist as efficient choices. We develop a model of fiscal decentralization that incorporates tastes for solidarity, multiple levels of government, and various tax and transfer instruments. We find that when solidarity is added to the traditional fiscal-federalism framework, the choice along the decentralized-to-centralized spectrum shifts toward a more centralized system

Fiscal decentralization policies and sub-national government debt in evolving federations

As part of a process of democratization, many countries spanning Europe, Latin Amertica, Africa, and Asia are reorganizing their governments by devolving fiscal responsibility and authority to newly empowered regional and local governments. Although decentralization in each country proceeds differently, a common element tends to be an initially heavy reliance on central government grants to fund regional spending. We develop a theoretical model of regional borrowing decisions in which the incentives for regional borrowing depend crucially on how the regions expect the federal system of finance to evolve. We examine the implications of the model using data on Spanish regions for the period 1984-1995 and find evidence that regions may be borrowing inefficiently in response to incentives imbedded in the Spanish system of fiscal decentralization.Fiscal decentralization, borrowing incentives

kNNDM CV: <i>k</i>-fold nearest-neighbour distance matching cross-validation for map accuracy estimation

Random and spatial cross-validation (CV) methods are commonly used to evaluate machine-learning-based spatial prediction models, and the performance values obtained are often interpreted as map accuracy estimates. However, the appropriateness of such approaches is currently the subject of controversy. For the common case where no probability sample for validation purposes is available, in Milà et al. (2022) we proposed the nearest-neighbour distance matching (NNDM) leave-one-out (LOO) CV method. This method produces a distribution of geographical nearest-neighbour distances (NNDs) between test and training locations during CV that matches the distribution of NNDs between prediction and training locations. Hence, it creates predictive conditions during CV that are comparable to what is required when predicting a defined area. Although NNDM LOO CV produced largely reliable map accuracy estimates in our analysis, as a LOO-based method, it cannot be applied to the large datasets found in many studies. Here, we propose a novel k-fold CV strategy for map accuracy estimation inspired by the concepts of NNDM LOO CV: the k-fold NNDM (kNNDM) CV. The kNNDM algorithm tries to find a k-fold configuration such that the empirical cumulative distribution function (ECDF) of NNDs between test and training locations during CV is matched to the ECDF of NNDs between prediction and training locations. We tested kNNDM CV in a simulation study with different sampling distributions and compared it to other CV methods including NNDM LOO CV. We found that kNNDM CV performed similarly to NNDM LOO CV and produced reasonably reliable map accuracy estimates across sampling patterns. However, compared to NNDM LOO CV, kNNDM resulted in significantly reduced computation times. In an experiment using 4000 strongly clustered training points, kNNDM CV reduced the time spent on fold assignment and model training from 4.8 d to 1.2 min. Furthermore, we found a positive association between the quality of the match of the two ECDFs in kNNDM and the reliability of the map accuracy estimates. kNNDM provided the advantages of our original NNDM LOO CV strategy while bypassing its sample size limitations.</p