micro incentives and municipal behavior political decentralization and fiscal federalism in argentina and mexico summary this article analyzes the mixed results of political and fiscal decentralization in latin america by comparing taxing and spending policies in six cities in argentina and mexico consistent with previous studies we find that decentralization has been frustrated by overconcentration of power at the provincial level and large vertical fiscal imbalances though we characterize these as functional elements in a system of redistributive policy making that benefits a wide array of provincial and municipal actors we seek to add a new dimension to the literature by arguing that micro level incentives conditions and circumstances particular to specific places are more important determinants of municipal behavior than macro level structures those policy and institutional changes intended to make officials more responsive to local conditions federalism local elections intergovernmental transfers and own source revenues we conclude that the theory of decentralization relies on a flawed conception of the causal mechanisms that are hypothesized to create responsiveness in local officials

expenditures and receipts testing for causality in state and local government finances the results of our tests indicate similarities between the expenditure tax receipt relations of state governments to those previously reported for the federal government in manage and marlow 1986 the results reported here indicate support for the hypothesis that tax receipts cause expenditures at the state level of government for tests utilizing symmetric lag structures ranging from three to five years state expenditures appear to follow state tax receipts for the shortest lag length 2 2 the determination of bidirectional causality does not make us reject the hypothesis that higher spending levels result from higher revenue levels rather the causality appears to be in both directions for the shortest lag length

politicians as experts electoral control and fiscal restraints we propose an argument for fiscal restraints that is based on the premise that the services of politicians are credence goods politicians are experts who specialize in observing the true state of the economy budget maximizing politicians are better informed than the electorate about the level of public spending necessary to manage public affairs voters who are able to observe the size of the budget but not the necessary level of spending affect the government s spending behavior via electoral control a fiscal restraint limits the maximum spending a government can choose we identify conditions under which such a fiscal restraint improves voter welfare and discuss the role of the political opposition as a second expert in situations in which the state of the economy requires a level of spending which exceeds the fiscal restraint

the contained rivalry requirement and a triple feature program for business ethics this paper proposes a description of the moral obligations of economic agents it will show that a threefold division should be adopted to distinguish moral obligations applying to their interactions in the market obligations applying to their interactions inside business firms and obligations applying to their interactions with agents outside the market competition might be permissible in the first case since markets are special patterns of social interactions called adversarial schemes they produce their benefits when agents try to satisfy exclusive preferences at the expense of others however moral obligations inside the firm and moral obligations outside the market are of a different nature this argument will be developed in the two first parts of this paper in the third part it will outline the relevant strengths of that account in relation with two popular views of economic agents moral obligations the shareholder primacy view and the stakeholder theory

compensating outside directors with stock the impact on non primary stakeholders two obvious trends in corporate governance include broadening board accountability beyond shareholders interests and paying outside directors with equity compensation stock and stock options by integrating common agency and instrumental stakeholder theories we examine the effect of stock compensation on secondary stakeholders and a firm s participation in social issues two areas where interests are less aligned with shareholder value consistent with our predictions we found that while stock compensation may be an effective way to align directors goals to those of shareholders it has adverse effects on important non shareholder constituencies in the company s operating environment

family firms corporate social performance a calculated quest for socioemotional wealth this study investigates the engagement of family firms in corporate social responsibility we first compare their corporate social performance csp to non family firms then following recent evidence on the heterogeneity of family firms we examine two factors that may influence csp within family firms the level of family control and the governance orientation of the country in which they operate this research is based on a theoretical framework which considers both agency and socioemotional wealth sew influences on family firms csr engagements overall we find that family firms exhibit lower csp than non family firms but when focusing on family firms our analyses show a curvilinear relationship between family control and csp at lower levels of control family owners invest more in social initiatives to protect their sew beyond a threshold level of control that we estimate at 36 in our sample economic considerations prevail over sew and social performance starts decreasing we also find that family firms operating in stakeholder oriented countries are more attentive to social concerns than those operating in more shareholder oriented countries

establishing property rights establishing secure property rights in transition economies amounts to solving two problems inefficiency structures of control rights over assets and poor contract enforcement politicians and bureaucrats still wield excessive control over assets which results in inefficient underinvestment by entrepreneurs corruption is one way of getting around political control but the drawbacks are considerable particularly the limited enforceability of corruption contracts more workable strategies for establishing property rights in transition economies are giving equity to the bureaucrats and other parties that have control reforming the civil service and removing bureaucratic control rights through privatization russia s experience shows how privatization combined with equity incentives for enterprise insiders transfers control rights from the bureaucrats and stimulates political and economic pressures to protect private property rights

the relationship between on budget and off budget government abstract this paper studies the hypothesis that controls on on budget government spending leads to greater off budget activity existence of a substitution effect suggests that our ability to control and measure the size of government is more difficult than previously thought

political decentralization and corruption evidence from around the world abstract how does political decentralization affect the frequency and costliness of bribe extraction by corrupt officials previous empirical studies using subjective indexes of perceived corruption and mostly fiscal indicators of decentralization have suggested conflicting conclusions in search of more precise findings we combine and explore two new data sources an original cross national data set on particular types of decentralization and the results of a firm level survey conducted in 80 countries about firms concrete experiences with bribery in countries with a larger number of government or administrative tiers and given local revenues a larger number of local public employees reported bribery was more frequent when local or central governments received a larger share of gdp in revenue bribery was less frequent overall the results suggest the danger of uncoordinated rent seeking as government structures become more complex

some evidence on the effect of the separation of spending and taxing decisions it is often argued that separation of public spending and taxing decisions engenders in the voter overoptimistic hopes that someone else will bear the cost of public services thereby inducing an increase in the size of government but are perceived tax prices systematically and persistently reduced by separation although in stock markets all agents expectations may be unbiased they may or may not be unbiased in political markets this paper analyzes the separation created in federal states when the central government finances local expenditures evidence from a dynamic decisive voter model is presented that indicates that the separation introduced by federal grants to canadian provinces did in fact reduce the perceived tax price of provincial public services and raise provincial expenditures the results suggest also that the effect of separation diminished over time

the causes of government expenditure growth a survey of the u s evidence abstract the growth of government budgets can be broken down into a institutional and institutional components the former component the familiar substitution income and population public goods tax sharing effects is estimated to contribute about two fifths of the growth of u s government spending the latter component rent seeking political redistributions bureaucracy and perceptual informational impedimentia is important too but an exact imputation cannot be asserted given the state of the art in empirical public choice theory the cross effects on spending of the growth of regulation and tax preferences or tax expenditures though interesting is not pursued

rights equity and economic efficiency the adelman morris premise that economic development and equity are incompatible is not supported by the evidence of a strong relationship between equality of rights and the income distribution the premise that equity requires the denial of individual rights and the affirmation of state control is an oxymoron what has been overlooked in the literature on growth and equity is the effect of the rights structure on both economic efficiency and on the income distribution the evidence is that free societies have much larger shares of income going to the middle 60 percent of the distribution than is observed in societies where men are not free to choose in politically open societies compared to politically closed regimes the share of income to the middle three quintiles is q2 10 7 vs 8 0 q3 16 0 vs 11 5 and q4 22 9 vs 17 9 in the aggregate the shares to the middle quintiles are 49 6 vs 37 4 in nations that obey the rule of law compared to regimes in which the rights of the state relative to the individual are paramount the comparisons are q2 11 2 vs 7 4 q3 16 3 vs 10 6 q4 23 0 vs 17 3 summing the three quintiles yields a comparison of 50 5 vs 35 3 in countries that have private property market allocation of resources and minimum intervention by the state compared to command economies the shares of income to the middle quintiles are q2 10 8 vs 8 0 q3 16 0 vs 11 1 and q4 22 8 vs 17 7 aggregated the shares of the middle class in regimes with high levels of economic liberty are 49 6 vs 36 8 for regimes with restricted private economic rights

business ethics and the end of history in corporate law henry hansmann has claimed we have reached the end of history in corporate law organized around the widespread normative consensus that corporate managers should act exclusively in the economic interests of shareholders in this paper i examine hansmann s own argument in support of this view in order to draw out its implications for some of the traditional concerns of business ethicists about corporate social responsibility the centerpiece of hansmann s argument is the claim that ownership of the firm is most naturally exercised by the group able to achieve the lowest agency costs and that homogeneity of interest within the ownership group is the most important factor in achieving lower costs he defends this claim through a study of cooperatives attempting to show that homogeneity is the source of the competitive advantage most often enjoyed by shareholders over other constituency groups such as workers suppliers and customers when it comes to exercising control over the firm some business ethicists impressed by this argument have taken it to be a vindication of milton friedman s claim that profit maximization is the only social responsibility of management i would like to suggest that this conclusion does not follow and that the hansmann argument lends itself to a less minimalist view what i refer to as a market failures approach to business ethics

leviathan in a dual economy this paper studies the policies of a leviathan state with an ambition to make money and to stay in power the economic framework is a developing country characterized by dual markets government revenue is raised by taxing the agricultural sector part of this revenue is offered to the politically influential urban population in the form of low productive but well paid public sector employment i calculate the optimal level of rural taxation from the point of view of the leviathan and investigate its effects on migration industrialization public sector employment and urban unemployment in different political scenarios

regulating without cost information the incremental surplus subsidy scheme the authors propose a regulatory mechanism called the incremental surplus subsidy iss scheme that can be implemented even when the regulato r has no knowledge of the monopolist s cost structure the regulator need only share the firm s knowledge of demand which may be imperfec t and be able to observe with a lag the firm s expenditures the i ss scheme induces the firm to set marginal cost prices to minimize p roduction costs and to undertake efficient investment levels it als o severely limits the firm s rents and eliminates them altogether if the firm s discount rate is known copyright 1988 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

optimal central banker contracts and common agency this paper considers the contracting approach to centralbanking in a simple common agency model we suggest thatcentral banker contracts that do not consider the possibilityof more than one principal existing are incomplete contracts such incomplete contracts can be a poor form ofmonetary policy delegation under common agency we develop amodel with two principals society government and ageneric interest group whose objective conflicts withsociety s ex ante preferences by incorporating an inflationarybias we determine when the government offered orinterest group offered contract dominates the central banker sdecision the results largely depend on whether theinterest group offered contract is written in terms of outputor inflation

the power to tax analytical foundations of a fiscal constitution preface 1 taxation in constitutional perspective 2 natural government a model of leviathan 3 constraints on base and rate structure 4 the taxation of commodities 5 taxation through time income taxes capital taxes and public debt 6 money creation and taxation 7 the disposition of public revenues 8 the domain of politics 9 open economy federalism and taxing authority 10 toward authentic tax reform prospects and prescriptions epilogue notes selected bibliography index

consistent conjecture and free entry oligopoly a general analysis abstract this paper shows that in an oligopoly model that allows free entry only competitive conjecture is consistent for any demand and cost functions and for any conjectural variation function that depends on the firm s own output and the outputs of the other firms

fiscal illusion and the grantor government empirical studies indicate that unconditional intergovernmental grants have a flypaper effect several authors have modeled recipient government spending under fiscal illusion to explain this phenomenon in short grants reduce the perceived marginal cost of recipient government output this paper develops a more general model of illusion that incorporates the grantor government thereby eliminating inconsistencies encountered in previous models the more general model implies that grant finance increases the perceived marginal cost of grantor government output thus grant induced illusion should have two effects an increase in recipient output and a decrease in grantor output the empirical work supports this hypothesis

reviving leviathan fiscal federalism and the growth of government this article revisits the influential leviathan hypothesis which pos its that tax competition limits the growth of government spending in decentralized countries i use panel data to examine the effect of fiscal decentralization over time within countries attempting to distinguish between decentralization that is funded by intergovernmental transfers and local taxation first i explore the logic whereby decentralization should restrict government spending if state and local governments have wide ranging authority to set the tax base and rate especially on mobile assets in countries where this is most clearly the case decentralization is associated with smaller government second consistent with theoretical arguments drawn from wel fare economics and positive political economy i show that governments grow faster as they fund a greater portion of public expenditures through intergovernmental transfers

centralization and government competition this paper examines the relationship between government size and fiscal centralization with specific focus on the separate influences of centralism and fragmentation on the size of public sector in the united states the empirical findings at the national level provide support to the hypothesis that fiscal decentralization leads to a smaller government the findings at the state and local levels however show no empirical relationship between government size and the degree of centralization

indirect methods for regulating externalities under uncertainty it is sometimes necessary or appropriate to correct an externality by intervening in the market for a privately traded commodity with which the externality is linked in these situations ad valorem taxation is a viable policy option it is argued that some combination of specific and ad valorem taxes will always outperform regulations which fix price administratively but that quantity standards may outperform taxes the analysis is applied to a problem in international trade

municipal annexation and local monopoly power we have found that the fiscal power of a city can be increased by extension of its borders within a land area that is homogeneous with respect to earning opportunities even when numerous rival jurisdictions exist in the area we hypothesized that extending municipal boundaries will have a positive effect on discretionary outlays and on expenditures per capita the evidence presented supports these hypotheses furthermore municipal wages appear to be significantly increased in cities experiencing annexation growth therefore we would expect to find that municipal employees are more inclined to favor annexation than the rest of the electorate from a policy standpoint this study suggests that significant perverse effects on fiscal efficiency may follow adoption of legal reforms that facilitate the ability of municipalities to extend their borders or that restrict the formation of new municipalities

the determinants of off budget activity of state and local governments the primary finding of this paper is that the off budget activity of the public sector is significantly and positively related to on budget activity by state and local governments we suggest the following policy implications one there appears to be evidence that the composition of total government activity is related to the relative costs of the alternative avenues of providing governmental activity future research into determining the nature of the relative cost differences may be one useful means of understanding both the composition of government activity as well as its total size two our ability to measure the true size of public sector participation in the economy must go well beyond our attempt here while we have presented information on one of the important hidden elements of public sector participation we are still a long way from effectively incorporating similar data on legislation regulations and so forth into our empirical tests further research into these issues is clearly warranted

off budget activities of local government the bane of the tax revolt this paper has demonstrated that the tax revolt of the 1970s has not been as successful in reducing the level of state and local government expenditure as preliminary empirical findings indicate and that the rate of increase in state and local public spending is likely to be far greater than previously believed the evidence presented here shows clearly that constitutional and statutory limitations on the taxing and spending powers of local governments have led to a massive amount of off budget spending and borrowing the debt issued by off budget enterprises is larger and growing at a much faster rate than the voter approved debt issued by state and local governments and has been since 1975 thus even though statistics on property taxation and expenditure may indicate a slow down in the growth of local taxation the true cost of local government may continue to increase at previous rates although this is an empirical question which we are not yet able to address off budget enterprises are heavily subsidized by local state and federal governments these subsidies represent a hidden tax liability to present and future generations of taxpayers in addition the debt and expenditures of obes contribute substantially to the crowding out of private spending and investment

optimal regulation of a consistent conjectures duopoly abstract previous regulatory incentive schemes have focused on monopoly or on competition with externalities this note examines a consistent conjectures duopoly deriving a specific tax function that induces optimal output even if the regulator is ignorant of demand and knows the cost function only up to an affine transformation the solution readily generalizes to symmetric oligopoly

stakeholder theory corporate governance and public management what can the history of state run enterprises teach us in the post enron era this paper raises a challenge for those who assume that corporate social responsibility and good corporate governance naturally go hand in hand the recent spate of corporate scandals in the united states and elsewhere has dramatized once again the severity of the agency problems that may arise between managers and shareholders these scandals remind us that even if we adopt an extremely narrow concept of managerial responsibility such that we recognize no social responsibility beyond the obligation to maximize shareholder value there may still be very serious difficulties associated with the effective institutionalization of this obligation it also suggests that if we broaden managerial responsibility in order to include extensive responsibilities to various other stakeholder groups we may seriously exacerbate these agency problems making it even more difficult to impose effective discipline upon managers hence our central question is a strong commitment to corporate social responsibility institutionally feasible in searching for an answer we revisit the history of public management and in particular the experience of social democratic governments during the 1960s and 1970s and their attempts to impose social responsibility upon the managers of nationalized industries the results of this inquiry are less than encouraging for proponents of corporate social responsibility in fact the history of public sector management presents a number of stark warnings which we would do well to heed if we wish to reconcile robust social responsibility with effective corporate governance

how corporate social performance is institutionalised within the governance structure since ackerman in corporate social responsiveness the modern dilemma 1973 pleaded for the institutionalisation of corporate social performance csp in business processes researchers have focused on the role of strategy in csp this article demonstrates that csp is institutionalised within the governance structure we will attempt to make this clear by means of a description of the dutch system of corporate governance under certain circumstances dutch companies are already bound to csp due to prevailing legislation a governance perspective shows that csp is institutionalised within a company s governance structure processes of responsiveness since long regarded as a starting point of csp analysis appear to be decision making processes within these processes the expectations of the stakeholders can be institutionalised trust can be built and interests can be incorporated this makes csp context dependent however it is possible to analyse companies by comparing the companies individual governance structures the article concludes that csp analysis can fruitfully extend into analysing in the role of the stakeholders in the influence pathways that are incorporated within the governance structure

the influence of special district government on public spending and debt growth in special district governments is examined as a reason behind public sector expansion in the united states a theoretical model is developed of the optimal mix of government suppliers which predicts how special district governments affect the overall provision of government policies the hypothesis that expansion of special district governments leads to expansion of the public sector is expirically examined over two time periods

political economy of mechanisms we study the optimal mirrlees taxation problem in a dynamic economy in contrast to the standard approach where the taxation mechanism is operated by a benevolent planner with full commitment power we focus on economies in which policy decisions are made by self interested politicians who cannot commit to policies the society controls politicians using elections we show that the provision of incentives to politicians can be partly separated from redistribution across agents and that political economy constraints can be modeled as introducing additional aggregate distortions in the dynamic mirrlees problem we provide conditions under which the political economy distortions persist or disappear in the long run if the politicians are as patient as the agents the best sustainable mechanism leads to an asymptotic allocation where the aggregate distortions arising from political economy disappear in contrast when politicians are less patient than the citizens positive aggregate labor and capital taxes remain even asymptotically we conclude by providing a brief comparison of centralized