Why is Argentina’s Fiscal Federalism so Inefficient? Entering the Labyrinth

Abstract

A long-standing concern in political economy is whether outcomes are efficient in political equilibrium. Recent contributions have examined the efficiency/inefficiency of policy choices from a theoretical point of view. The aim of this paper is to examine such issue empirically. Building on existing "economic" diagnoses that highlight the deficient incentives present in Argentina’s Federal Tax-Sharing Agreement the paper will attempt to understand the politics behind its adoption and persistence. We suggest an explanation based on the transaction costs of Argentina’s political market. Although potentially Pareto-improving policies could have been adopted, they were not introduced because of the uncertainty over the future status of today’s bargains, and given the lack of institutions to enforce bargains among the political actors. The paper concludes offering some preliminary ideas for institutional engineering: what governance structures could help reduce these transaction costs? The purpose is to create an institutional framework in which political actors could negotiate among themselves, ensuring the enforceability of agreements, in order to achieve more efficient outcomes.