the effects of vertical and horizontal incentives on local tax efforts evidence from china abstracttax effort is a measure of a government s effort to collect taxes this study explores what impacts both vertical and horizontal incentives have on local governments tax efforts in china for consistency with the literature we first include typical economic and institutional factors in our analysis we find that the effects of economic factors on local tax efforts are significant but the effects of institutional factors tend to be weak fiscal decentralization as a vertical incentive has a significantly positive effect on tax efforts at the provincial level meanwhile fiscal interaction as a horizontal incentive is also taken into account in a spatial specification to explain tax competition among local governments the results show that local tax effort in china also depends on the horizontal incentive hence to improve local tax effort the central government should let the locals have more autonomy in collecting taxes and evaluate local tax effort by referring to tax collection in adja

testing the taxmimicking versus expenditure spill over hypotheses using english data spatial interaction among local governments in tax setting and public spending decisions is receiving increasing attention in the applied public economics literature spatial interaction models rely on the presence of an externality from local budget making in traditional public finance models external effects originate either from interjurisdictional resource flows due to tax competition for a mobile base or from local public expenditure spill overs into neighbouring jurisdictions however the recent political agency yardstick competition literature has stressed the role of informational externalities between neighbouring jurisdictions and predicted tax mimicry at the local level the actual relevance of the above hypotheses clearly needs to be assessed empirically in this paper an attempt is made at discriminating between alternative sources of local fiscal interaction by using data on the english municipal authorities budgets while both public spending levels and local property tax rates ex

tax competition among u s states racing to the bottom or riding on a seesaw abstract dramatic declines in capital tax rates among u s states and european countries have been linked by many commentators to tax competition an inevitable race to the bottom and underprovision of local public goods this paper analyzes the reaction of capital tax policy in a given u s state to changes in capital tax policy by other states our study is undertaken with a novel panel data set covering the 48 contiguous u s states for the period 1965 to 2006 and is guided by the theory of strategic tax competition the latter suggests that capital tax policy is a function of foreign out of state tax policy preferences for government services and home state and foreign state economic and demographic conditions the slope of the reaction function the equilibrium response of home state to foreign state tax policy is negative contrary to casual evidence and many prior empirical studies of fiscal reaction functions this result which stands in contrast to most published findings is due to two critical elements that allow for delayed responses to foreign tax changes and responses to aggregate shocks omitting either of these elements leads to a misspecified model and a positively sloped reaction function our results suggest that the secular decline in capital tax rates at least among u s states reflects synchronous responses among states to common shocks rather than competitive responses to foreign state tax policy while striking given prior empirical findings these results are fully consistent with the implications of the theoretical model developed in this paper and presented elsewhere in the literature rather than racing to the bottom our findings suggest that states are riding on a seesaw consequently tax competition may lead to an increase in the provision of local public goods and policies aimed at restricting tax competition to stem the tide of declining capital taxation are likely to be ineffective

characterizing spanish labour pathways of young people with vocational lower secondary education school to work transition is no longer considered to take place at one point but it is seen as a sequential process with multiple stages that extend over a relatively long period in which individuals gradually settle down into the labour market this article constructs and examines the labour pathways followed by spanish young people who have completed vocational lower secondary education to do so we use the survey on educational training transition and labour integration a retrospective longitudinal dataset that contains monthly calendar information about the labour states in the 4 years after completing vocational education a wide range of states is covered part time employment full time employment unemployment and several situations of inactivity to examine young labour pathways we use sequence analysis an exploratory technique which allows us to obtain a measure of dissimilarity between sequences later a cluster analysis is applied that allow us to identify seven patterns of transition into

competition in the public school sector evidence on strategic interaction among us school districts abstract this paper provides evidence on strategic interaction among local school districts the analysis makes use of a significant change in the institutional environment for school districts in michigan in 1996 when the state established a voluntary inter district choice program the school districts participation decisions are modelled as discrete choice decisions using a spatial latent variable model strong effects are found saying that lagged adoptions of neighbors positively affect the current probability of participation a simple test exploiting limitations of student mobility in inter district transfers suggests that the driving force for interdependencies among adoption decisions was competition for students

cross border commuting and consuming an empirical investigation abstractthis article contributes to our understanding of cross border activity in general and the determinants of cross border trade in particular by focusing on the part of cross border sales that arise due to work related cross border crossings of households we analyse empirically how cross border consumption expenditures vary across product and services categories as well as household characteristics using representative household survey data of cross border commuters to luxembourg in total these households spend an estimated 17 of their gross annual income across the border contributing about 10 to the total household final consumption expenditure hfce in luxembourg cross border expenditure is linked to individual and household related characteristics and to distance between home and work cross border commuters systematically exploit arbitrage opportunities that arise because of existing price level index differences between the country of work and the country of residence

economic reform and allocative efficiency in china s state owned industry beginning in late 1978 the people s republic of china introduced sweeping reforms into its management of state owned industry before reform the allocation of labor capital and materials to industrial enterprises was carried out administratively at the central or regional level and output was typically sold to the state at controlled prices this planned system succeeded in channeling capital and labor into industry and raising industrial output but there is considerable evidence that allocative efficiency has been poor in this planned sector total factor productivity tfp was at best stagnant in chinese industry from 1957 to 1978 and may have actually declined over that period decisions made by the central committee of the chinese communist party at its third plenum in december 1978 led to the development of a reform program for the chinese economic system concrete plans for reform started to be announced by the state council in mid1979 the centerpiece of reform has been the devolution of economic control to the enterprise level in the agricultural sector this meant breaking up the communes and introducing the family responsibility system providing individual peasant families considerable freedom to choose inputs and outputs sell a large share of output on free markets and retain the profits agricultural output grew rapidly in the years following reform and there is a growing body of evidence that resource use has become more efficient in chinese agriculture 2 there have been analogous attempts to reform state owned industry in china which consists of 87 000 enterprises and accounts for three quarters of the country s industrial output the reforms have provided enterprises with more freedom in hiring or purchasing inputs including capital materials and to a lesser extent labor enterprises now have limited ability to alter their product line and introduce new

identifying local tax mimicking with administrative borders and a policy reform abstract this paper exploits an exogenous reform of the local fiscal equalization scheme in the german state of north rhine westphalia nrw in 2003 to identify tax mimicking by municipalities in the neighboring state of lower saxony nds the reform caused municipalities in nrw to increase their business and property tax rates i study within the difference in difference dd and the spatial lag sl frameworks whether municipalities in nds bordering nrw did react to the exogenous tax increases by nrw municipalities the dd and sl results suggest that there are no interactions in tax rates in contrast traditional sl regressions that rely on variation in neighbors demographic and political characteristics for identification provide strong evidence for immediate strategic interactions these results indicate that most of the existing literature overestimates the importance of local tax mimicking

local public goods inter regional transfers and private information abstract suppose that the centre wishes to make transfers between member states of a federation to reduce inequality however it lacks precise information concerning the cost differences that are responsible for the initial income inequality we examine the implications of asymmetric information for the design of the transfer scheme we show that if member states inherent cost levels as local public good providers take discrete values the first best or complete information transfer scheme may or may not violate incentive compatibility if inherent cost is a continuous random variable such a scheme certainly violates incentive compatibility we also explore the possibility of binding participation constraints in our model a binding incentive compatibility constraint leads to a reduction in effort devoted to cost reduction and a binding participation constraint will also lead to a violation of samuelson s optimality condition for public good provision

strategic fiscal interaction across borders evidence from french and german local governments along the rhine valley abstract this article contributes to the literature on local tax interactions its novelty lies in its focus on the interactions of local governments across national borders we use panel data for the french and german municipalities in the rhine valley for the period 2000 2007 the local governments of each country influence firms overall tax burdens but the tax instruments available at the local level differ we estimate panel models that distinguish between the effects of competing municipalities belonging to the same country and belonging to the other country our empirical model shows that local jurisdictions along borders choose their business tax rates based on those of their domestic neighbors and that foreign fiscal policy does not have an impact on the local domestic tax setting behavior in these contexts

equilibrium unemployment with internal labour markets the flow approach to the labour market is based on a clear distinction between trade and production this paper argues that this separation is not realistic because many firms in developed economies usually fill an important share of their vacancies by upgrading incumbent employees the implications of the existence of internal labour markets are explored with the help of a simple model that extends the well known pissarides setup the main result is that the distribution of unemployment by education is correlated with the relative importance of internal labour markets in particular i show that more internalization is associated both with more inequality in the distribution of unemployment with the burden falling mainly on the less educated and with less inequality in the distribution of wages by education the model also generates in a simple way upward sloping wage profiles which are offered by firms with internal labour markets to their recruits who face a nonzero probability of promotion to a skilled job

do countries compensate firms for international wage differentials we address the role of labor cost differentials for national tax policies modeling a tax competition race between two countries competing for a population of mobile firms we show that in equilibrium the high wage country charges a lower tax than the low wage country moreover under tax competition the high wage country attracts more firms than in a setting without taxation exploiting exogenous variation in labor cost differentials induced by the breakdown of communism in eastern europe we find that tax policies are in line with the model prediction our most conservative estimates suggest that a one dollar increase in the compensation cost differential in prices as of 2000 triggers a cut of the statutory corporate income tax rate by about one percentage point

identification of endogenous social effects the reflection problem this paper examines the reflection problem that arises when a researcher observing the distribution of behaviour in a population tries to infer whether the average behaviour in some group influences the behaviour of the individuals that comprise the group it is found that inference is not possible unless the researcher has prior information specifying the compisition of reference groups if this information is available the prospects for inference depend critically on the population relationship between the variables defining reference groups and those directly affecting outcomes inference is difficult to implossible if these variables are functionally dependent or are statistically independent the prospects are better if the variables defining reference groups and those directly affecting outcomes are moderately related in the population

incentives and optimal size of local jurisdictions abstract a model of optimal territorial decentralization is presented in which smaller local governments have an informational advantage concerning public goods production costs and the central government has imperfect information on spillover effects induced by local projects the attention is focused on the optimal size of local entities and on the shape of transfer schedules from the central government to local jurisdictions the optimal territorial organization is a compromise between small jurisdictions so as to benefit from the geographical proximity effect on information and large entities in which spillover effects are more easily internalized by means of linear or non linear taxation schemes implemented by the centre

fiscal federalism decentralization and economic growth a meta analysis the theoretical literature on fiscal federalism has identified several channels through which government decentralization could affect economic growth much of the literature focuses on the efficiency aspects of a decentralized provision of public services but decentralization may also increase growth by raising the ability of the political system to innovate and carry out reforms in contrast some authors argue that decentralization increases corruption and government inefficiency and thus may diminish growth given this theoretical ambiguity several studies have attempted to identify the effect of decentralization on economic growth empirically over the last two decades we review and conduct a meta analysis of this empirical literature based on our analysis we point out open questions and discuss possible ways to answer them jel h77 043 c52 i introduction building on various theoretical contributions an empirical literature analyzing the effect of fiscal decentralization on economic growth has emerged since the 1990s the relevant studies vary as to whether they use cross sectional time series or panel data as to whether they rely on cross country or single country samples and they vary in estimation methods decentralization measures and sample composition given the size and heterogeneity of the empirical literature it is useful to review the individual studies and summarize their main findings conducting a comprehensive search we identify 31 published and unpublished studies on the effect of fiscal decentralization on economic growth each of these studies estimates several models resulting in over 400 individual estimates while we first review these studies in a traditional manner our main aim is to analyze these estimates quantitatively specifically the main contribution of this article is to offer a meta analysis of the empirical findings on fiscal decentralization and economic growth a meta analysis is a useful methodology in our context as it is difficult to obtain clear cut conclusions with only a traditional survey of empirical literature the individual studies vary substantially in their characteristics and correspondingly in the findings they report by conducting a meta analysis however we can identify how the idiosyncratic characteristics of a particular study relate to its findings the meta analysis approach thus addresses model uncertainty with regard to each individual estimate in addition it can also serve as a partial response to the methodological critique of empirical research on fiscal decentralization by rodden 2004 as it helps to clarify the quantitative effects of different decentralization measures and estimation techniques finally as meta analytical techniques are rarely used in economics we also aim at contributing to the further establishment of this methodology stanley 2001 2008 the next section briefly discusses the various theoretical arguments as to why fiscal decentralization may affect economic growth we then provide a short traditional survey of the empirical studies in section iii we review this literature more systematically and quantitatively in section iv in section v we report the results of meta regressions and discuss how the idiosyncratic characteristics of a given study are related to its specific findings finally section vi provides a discussion of the results and some conclusions ii how could fiscal federalism affect economic growth theoretical approaches within the framework of the solow swan model solow 1956 swan 1956 fiscal federalism may be associated with a different level of efficiency in governance than unitary systems leading to a different value of solow s a the level of technology a regime change toward federalism would then be associated with temporarily different growth rates and eventually different levels of income but not with persistent growth differences

inter jurisdictional competition for firms regions inhabited with an immobile population of disabled and able individuals compete to attract mobile firms that provide jobs the redistributive goal of regional governments is to support the disabled who cannot work able individuals may work be involuntary unemployed because of frictions in the labor market or choose to be voluntary unemployed labor force participation decisions depend on regional redistributive policies both the size of workforce and tax on firms affect profits and therefore firms location decisions allowing regions to engage in tax competition may be efficient if regions cannot tax firms they compete by implementing inefficient redistributive policies

youth labour markets in spain education training and crowding out abstract the stylised facts describing the poor performance of the youth labour market in spain over the last two decades entailing high unemployment rates for both higher and lower educated workers over education and low intensity of on the job training are explained through a simple matching model where higher educated workers crowd out lower educated ones from their traditional entry jobs in this model a combination of rigid labour market institutions and an increase in the relative supply of higher educated workers harms the training prospects of lower educated workers

an unbalanced spatial panel data approach to us state tax competition abstract this paper assesses spatial competition in excise taxation among us states over the time period 1975 1999 we estimate the slope and shifters of the tax reaction curves using spatial panel data methods recently proposed by kapoor et al in press kapoor m kelejian h h prucha i r in press panel data models with spatially correlated error components j econ

drowned by numbers stabilization properties of an eu wide unemployment insurance system the recent crisis has given rise to proposals for the creation of a european unemployment insurance system we simulate an eu wide mechanism under various scenarios varying methods of financing common or country specific contribution rates and triggers for pay outs all time or contingent clauses we analyse the impact of the system using different measures of stabilization under different fiscal multipliers a system operating during bad times periods where the increase in unemployment is large would reduce gdp growth variability but also growth correlation among member countries hence there is a trade off between stabilization and synchronization of national business cycles

savings commodity market rationing and the real rate of interest in china abstract the theoretical nature of risk premiums in foreign currency futures markets is derived and studied empirically estimation problems encountered in using futures data are discussed since forward rates and futures prices have been found to be approximately equal and because risk in daily risk premiums in the futures market unbiasedness of daily futures prices as predictors of the following day s futures price is rejected for all currencies reconciliation of daily and monthyl data requires positive serial correlation in daily risk premiums

nonlinear income taxation and matching grants in a federation with decentralized in kind transfers we extend to a fiscal federalism setting the literature on redistributive in kind transfers in the presence of nonlinear income taxation local governments have a cost advantage motivating decentralization of the in kind transfer the cost structure varies across regions and the central government cannot observe which region is which we show that decentralized in kind transfers can in this setting be an even more important instrument for relaxing self selection constraints thus helping redistribution than in single government models we characterize the optimal marginal tax rates and matching grants the grants have a very different structure than the one derived in earlier studies

fiscal federalism and monetary unions a quantitative assessment abstract in this paper i provide a quantitative analysis of three different forms of fiscal federalism in monetary unions fully decentralized regional fiscal authorities as the benchmark fiscal equalization with nominal tax revenue sharing and a common central fiscal authority i assess the capability of the different arrangements to stabilize regional consumption output and employment over the business cycle i also study the implications for interregional income consumption risk sharing and welfare from this analysis the following results emerge first a central fiscal authority stabilizes consumption fluctuations and increases the scope of interregional income and consumption risk sharing second fiscal equalization destabilizes consumption fluctuations and also reduces the scope of interregional income and consumption risk smoothing third a central fiscal authority leads to welfare gains whereas fiscal equalization leads to welfare losses

debt leases taxes and the endogeneity of corporate tax status we provide evidence that corporate tax status is endogenous to financing decisions which induces a spurious relation between measures of financial policy and many commonly used tax proxies using a forward looking estimate of before financing corporate marginal tax rates we document a negative relation between operating leases and tax rates and a positive relation between debt levels and tax rates this is the first unambiguous evidence supporting the hypothesis that low tax rate firms lease more and have lower debt levels than high tax rate firms many theories of capital structure imply that all else equal the incentive to use debt financing increases with a firm s marginal tax rate due to the tax deductibility of interest expense e g modigliani and miller 1963 deangelo and masulis 1980 conversely leasing models generally predict that firms with low marginal tax rates employ relatively more leases than do firms with high marginal tax rates the logic behind the leasinlg prediction is that leases allow for the transfer of tax shields from firms that cannot fully utilize the associated tax deduction lessees to firms that can lessors e g myers dill and bautista 1976 smith and wakeman 1985 ross westerfield and jaffe 1996 despite these straightforward predictions empirically testing for tax effects is difficult because a spurious relation exists between the financing decision and many commonly used tax proxies specifically both interest expense and lease payments are tax deductible thus a firm that finances its operations with debt or leases reduces its taxable income potentially lowering its expected marginal tax rate if not properly addressed this endogeneity of the tax rate can bias an experiment in favor of finding a negative

decentralization and macroeconomic performance in china regional autonomy has its costs abstract we give an empirical examination of the impact of fiscal and economic decentralization in china on the country s economic growth and inflation using a vector autoregressive var model with latent variables our econometric investigation offers strong evidence that there is a connection between decentralization and macroeconomic performance in china economic decentralization appears to be positively related to growth in real output for the entire postwar period in china fiscal decentralization seems to have adverse implications for the rate of inflation especially after the late 1970s decentralization would therefore seem to be good for growth and bad for price stability

matching grants and ricardian equivalence this paper investigates the effectiveness of matching grants to correct for interjurisdictional spillovers in the light of bernheim general neutrality result indeed this result suggests that the usual argument that matching grants are needed to internalize the externality arising from the existence of interjuridictional spillovers is an artifact of the assumption that jurisdictions neglect the impact that their decisions have on the federal budget relaxing this assumption and using a classical model where the arbitrage resulting from labor mobility implies that redistribution has the properties of a public good we find that matching grants are relevant although somewhat less ective we also find that optimal matching rates are independent of the number of jurisdictions and their strategic variables contrarily to the case where jurisdictions ignore the impact of their decisions on the federal budget

local public goods risk sharing and private information in federal systems abstract we examine the implications of information asymmetries for the optimal design of interregional insurance schemes and the allocation of local public goods we have good and bad news the good news is that the presence of informational asymmetries is not in itself sufficient to deny federations the attainment of either efficiency or egalitarian goals the bad news is that not only the first best may not be incentive compatible but also the incentive compatible optimum may violate participation constraints federations may have to content themselves with fourth best allocations as a result of strategic manipulation of information by privately informed jurisdictions

sharing budgetary austerity under free mobility and asymmetric information an optimal regulation approach to fiscal federalism in the present article tiebout meets laffont and tirole in the land of fiscal federalism a non trivial principal multi agent model is used to characterize the optimal intergovernmental grant schedule when the cost of local public goods depends on hidden characteristics and actions of local governments and under citizen free mobility we show how informational rents landlords interests and citizen mobility interact to produce distortions at both ends of the type space in particular the most efficient jurisdictions should overproduce and overtax in second best optimum informational asymmetries decrease the average production of public goods and increase the inter jurisdictional variance of taxes and public good production

channels of interstate risk sharing united states 1963 1990 we develop a framework for quantifying the amount of risk sharing among states in the united states and construct data that allow us to decompose the cross sectional variance in gross state product into several components which we refer to as levels of smoothing we find that 39 percent of shocks to gross state product are smoothed by capital markets 13 percent are smoothed by the federal government and 23 percent are smoothed by credit markets the remaining 25 percent are not smoothed we also decompose the federal government smoothing into subcategories taxes transfers and grants to states

regional decentralization and fiscal incentives federalism chinese style abstract aligning the interests of local governments with market development is an important issue for developing and transition economies using a panel data set from china we investigate the relationship between provincial government s fiscal incentives and provincial market development we report three empirical findings first we find that during the period of fiscal contracting system the discrepancy between ex ante contracts and ex post implementation was relatively small suggesting that the fiscal contracts were credible second we find a much higher correlation about four times between the provincial government s budgetary revenue and its expenditure during 1980s and 1990s as compared to 1970s demonstrating that provincial governments faced much stronger ex post fiscal incentives after reform third we find that stronger ex ante fiscal incentives measured by the contractual marginal retention rate of the provincial government in its budgetary revenue are associated with faster development of the non state sector as well as more reforms in the state sector in the provincial economy this holds even when we control for the conventional measure of fiscal decentralization finally we compare federalism chinese style to federalism russian style

fiscal decentralization rural industrialization and undocumented labour mobility in rural china 1982 87 chen y p fiscal decentralization rural industrialization and undocumented labour mobility in rural china 1982 87 regional studies this paper explores the relationship between fiscal decentralization which gave greater rural industrialization and fiscal authority to local governments and the emergence of rural rural undocumented inter provincial labour migration during china s initial reform period a heckman model is employed to correct for the zero observation problems and to estimate consistently the labour mobility with a modified gravity equation given the institutional barriers the fiscal decentralization has two contending effects on labour market integration local economic development promotes labour mobility but local public goods crowding restrains the inflow of labour at the destination the crowding effect is stronger at lower levels of government

optimal secession rules abstract should the constitution of a federation allow for peaceful secession constitutionally defined secession rules are optimal ex post if the federation breaks down however they may be suboptimal ex ante if the member countries receive a benefit from the perceived long term stability of the federation and constitutionally defined secession rules increase the probability of a break up the optimal social contract trades off ex ante benefits and ex post losses and it may avoid explicit secession rules if transfers are costly the trade off is present even if ex post renegotiation is allowed finally we show that under asymmetric information it is more difficult to keep the federation together and that a secession war may occur

budget spillovers and fiscal policy interdependence evidence from the states abstract this paper formalizes and tests the notion that states expenditures depend on the spending of similarly situated states we find that even after allowing for fixed state effects year effects and common random shocks among neighbors a state government s level of per capita expenditure is positively and significantly affected by the expenditure levels of its neighbors ceteris paribus a one dollar increase in a state s neighbors expenditures increases its own expenditure by over 70 cents

fiscal flows and financial markets to what extent do they provide risk sharing within sweden andersson l fiscal flows and financial markets to what extent do they provide risk sharing within sweden regional studies the objective of this paper is to analyse the amount of risk sharing that takes place between regions in sweden it is found that the capital market is the largest source of risk sharing of an exogenous change in gross regional product in sweden still roughly 20 of a change in regional output is smoothed among the regions through the fiscal system there is also some evidence that there are regional differences in the sense that regions located in the south rely more on the capital market as a source of insurance against shocks in output while the tax and transfer systems provide a larger extent of risk sharing for regions located in the north andersson l flux fiscaux et marches financiers dans quelle mesure assurent ils le partage de risques en suede regional studies l objet de cette communication est d analyser l importance du partage de risques entre regions suedoises

road tax interactions among local governments a spatial panel data analysis of the french case over the period 1984 2000 abstractthis article contributes to the literature on local tax interactions its novelty lies in its focus on the interactions of local governments via an indirect local tax on vehicles such as th

operating leases and the assessment of lease debt substitutability operating leases are estimated in the current paper to be approximately thirteen times larger than finance leases on average in recognition of this the paper investigates the degree of substitutability between leasing and non lease debt using a comprehensive measure of leasing improving on the partial measures used in prior research operating lease liabilities are estimated using the constructive capitalisation approach suggested by imhoff lipe and wright 1991 accounting horizons 5 pp 51 63 modified to incorporate company specific and uk relevant assumptions the results imply that leasing and debt are partial substitutes with 1 of leasing displacing approximately 0 23 of non lease debt on average consistent with the argument that lessors bear some risks which are not inherent in debt contracts these findings suggest that substitution effects are not uniform across lease types

is there a race to the bottom in the setting of welfare benefit levels evidence from a policy intervention abstract in this paper we investigate whether local governments react on the welfare benefit levels in neighboring jurisdictions when setting their own benefit levels we solve the simultaneity problem arising from the welfare game by utilizing a policy intervention more specifically we use a centrally geared exogenous placement of a highly welfare prone group refugees among swedish municipalities as an instrument the iv estimates indicate that there exists a race to the bottom and that the effect is economically as well as statistically significant if the neighboring municipalities decrease their welfare benefit level by 100 sek a municipality decreases its benefit level with approximately 41 sek this result is robust to several alternative model specifications

incumbent behavior vote seeking tax setting and yardstick competition this paper develops a model of the political economy of tax setting in a multijurisdictional world where voters choices and incumbent behavior are determined simultaneously voters are assumed to make comparisons between jurisdictions to overcome political agency problems this forces incumbents into a yardstick competition in which they care about what other incumbents are doing we provide a theoretical framework and empirical evidence using u s state data from 1960 to 1988 the results are encouraging to the view that vote seeking and tax setting are tied together through the nexus of yardstick competition

tax competition among local governments evidence from a property tax reform in finland this paper uses a finnish policy intervention to study tax competition among local governments changes in the statutory lower limits to the property tax rates are used as a source of exogenous variation to estimate the responses of municipalities to tax rates in their neighboring municipalities i do not find evidence of interdependence in property tax rates among finnish municipalities the results are in contrast to the earlier empirical literature using data from other countries that has mainly found positive interdependence in tax rates i compare the causal estimates based on the policy change to the commonly used spatial lag estimates and spatial instrumental variables estimates which are based on highly restrictive assumptions the comparisons suggest that the standard spatial econometrics methods may have a tendency to overestimate the degree of interdependence in tax rates

jeux sans frontieres tax competition and tax coordination when countries differ in size closer international integration is putting increasing pressure on existing national tax structures this paper uses a simple two country model to address a range of consequent policy concerns focusing particularly on the role of country size differences in size exacerbate the inefficiency from noncooperative behavior harming both countries the smaller country loses from harmonization to any tax rate between those set in the noncooperative equilibrium but both countries gain from the imposition of a minimum tax anywhere in that range the fully optimal response to freer cross border trade however may be to do nothing jel h20 h77

a tiebout tax competition model abstract this paper analyzes a tiebout tax competition model where heterogeneity of consumer preferences is introduced into a standard tax competition framework following the modern tiebout tradition consumer sorting in the model is achieved through the activities of profit maximizing community developers once sorting is achieved the equilibrium is equivalent to that in a standard tax competition model with immobile but heterogeneous consumers a principal lesson of the analysis is that under capital taxation consumers with high public good demands are worse off than under a head tax regime in pursuit of high levels of public spending high demand communities impose high tax rates which drive away capital the analysis also establishes a number of other results

minimum wage competition between local governments in china abstractthe theory of fiscal and regulatory competition between jurisdictions is more advanced than its empirical testing this is particularly true of labour regulation in general and minimum wag

efficiency and equalization payments in a federal system of government a synthesis and extensions of recent results this paper investigates the rationale for a system of equalization transfers in a federal system of government the existing sources of inefficiency of resource allocation in economies with more than one level of government are synthesized in the framework of a simple decentralized multiprovince model with mobile factors of production the sources of inefficiency arise first because migrants respond at the margin to incorrect signals owing to the phenomena of rent sharing and fiscal exterality and second because of global rather than local inefficiencies the model is then extended to consider the role of the federal government in providing intergovernmental transfers in the face of such inefficiencies in addition to synthesizing the sources of inefficiency in federal models the equity arguments for equalization are briefly recounted efficacite et paiements de perequation dans un systeme federal de gouvernement synthese et extensions de certains resultats recents ce memoire examine la logique qui soustend un systeme de paiements de perequation dans un systeme fdderal de gouverement les auteurs utilisent un modele simple d un systeme multi provincial decentralise avec des facteurs de production mobiles pour definir les sources d inefficacite dans l allocation des ressources dans les dconomies qui possedent plus d un niveau de gouvernement ces inefficacites proviennent de ce que d abord ceux qui se deplacent le font en reponse a la marge a des signaux incorrects engendres par le partage de la rente sur la base de la residence et par les phenomenes d exteralites fiscales elles sont aussi le resultat d inefficacites globales plutot que locales dans le cadre de ce modele les auteurs analysent le role du gouvernement federal effectuant des transferts inter gouverementaux pour corriger ces inefficacites en plus de presenter une synthese des sources d inefficacite dans les regimes federaux les auteurs font un bref rappel en passant a l ensemble des arguments fondes sur l equite qu on utilise pour rationaliser les paiements de perequation this paper is a linear combination of two papers presented at the may 1982 meetings of the canadian economics association in halifax entitled the case for equalization payments by the authors and recent developments in the theory of regional economic policy in canada by boadway the authors are grateful for comments by the discussants jim johnson and baxter macdonald and by jack mintz brian scarfe gerard belanger david sewell tom courchene and the referees we are especially heavily indebted to dan usher for many stimulating comments and suggestions while the work was in progress some of the above persons will undoubtedly disagree with the emphasis we have chosen to put on various aspects of the analysis for policy purposes support for some of this work has been provided by the economic council of canada and is gratefully acknowledged canadian journal of economics revue canadienne d economique xv no 4 november novembre 1982 printed in canada imprimd au canada 0008 4085 82 0000 0613 01 50 1982 canadian economics association this content downloaded from 207 46 13 127 on wed 12 oct 2016 04 27 47 utc all use subject to http about jstor org terms 614 robin boadway and frank flatters

interregional redistribution and budget institutions under asymmetric information empirical evidence from the u s and the european union suggests that regions which contribute to interregional redistribution face weaker borrowing constraints than regions which benefit from interregional redistribution this paper presents an argument in favor of such differentiated budget institutions it develops a two period model of a federation consisting of two types of regions the federal government redistributes from one type of regions contributors to the other type recipients it is shown that a fiscal constitution with lax budget rules for contributors and strict budget rules for recipients solves the self selection problem the federal government faces in the presence of asymmetric information regarding exogenous characteristics of the regions

reassessment of the tiebout model abstract the tiebout model has been the reference point for the classical approach to fiscal federalism its emphasis on mobility benefit taxation and the advantages of fiscal competition have informed fiscal federalism since the seminal contributions of musgrave and oates this paper reviews the influence that the tiebout model has had on fiscal federalism and argues that while its insights remain relevant for local government it is far from compelling as a positive description of or a normative prescription for fiscal federalism at the state level some aspects of alternative approaches are presented which lead to different perspectives than tiebout inspired ones

nash equilibria in models of fiscal competition abstract this paper analyzes nash equilibria in a simple model of an economy with jurisdictions engaging in fiscal competition small number nash equilibria in which tax rates are the strategic variables are shown not to coincide with nash equilibria in which public expenditure levels are the strategic variables

decentralization and international tax competition abstract this paper models tax competition between two countries that are divided into regions in the first stage of the game the strategy variable for each country is the division of a continuum of public goods between central and regional government provision in the second stage the central and regional governments choose their tax rates on capital a country s decentralization level serves as a strategic tool through its influence on the mix of horizontal and vertical externalities that exists under tax competition in contrast to standard tax competition models decentralizing the provision of public goods may improve welfare

innovation and bureaucracy under soft and hard budget constraints because of the inherent uncertainty promotion of innovation critically depends on screening mechanisms to select projects this paper studies the relationship between bureaucracy and financial constraints as two such mechanisms the lack of commitment to hard financial constraints interferes with its ex post screening capability ex ante bureaucratic screening is optimally chosen as a substitute however bureaucracy makes mistakes by rejecting promising projects and delays innovation and the efficiency loss due to soft financial constraints increases as prior knowledge becomes worse and as research stage investment requirements become lower in a centralized economy bureaucracy may reduce the number of parallel projects particularly for projects with higher uncertainties and less research stage requirements this theory fits much of the evidence and in particular it explains why the computer industry but not the nuclear or aerospace industries has fared so poorly in centralized economies the fundamental importance of innovation to the survival and evolution of economic systems and organizations has long been recognized marx 1978 schumpeter 1950 innovation is characterized by its inherent uncertainty because it is a process whose every element takes considerable time in revealing its true features and ultimate effects schumpeter 1950 p 83 and people are unable to anticipate the future impact of successful innovations even after their technical feasibility has been established rosenberg 1994 an understanding of how different systems and organizations deal with the uncertainties associated with innovation and the resultant consequences is crucial for understanding alternative economic systems and organizations in this paper we provide a theory to analyse how different systems screen uncertain innovative projects and the impact of the various screening mechanisms on those systems we distinguish two alternative screening mechanisms the bureaucratic screening mechanism vs the market screening mechanism the latter is directly linked to financial constraints with this perspective our theory explains why centralized economies did well in certain areas of innovation but fared poorly in others for instance in the early 1960s the west was frightened by the ussr s great success in launching the first unmanned satellite and the first manned space capsule while in the 1980s in contrast the centralized system

does institutional change spread across countries explaining spatial patterns in human rights if a country improves its human rights record will neighbouring countries benefit beneficial spillovers could justify intervention by the un or one of the many other organisations that internationally fight human rights violations we document that countries human rights performances often resemble the human rights situation of their neighbours however exploiting time variation in a spatial panel we find that much of that resemblance is simply determined by the shared geographical location changes in neighbouring countries have little influence on local human rights suggesting that contemporaneous spillovers and interactions are limited

mismatch in the spanish labor market overeducation the objective of this article is to explain the job match which is assessed by comparing attained education and job required education as reported by workers we frame our empirical work according to the occupational mobility theory using a cross section of workers from a representative survey of the spanish labor force we consider overeducated workers to be those who report that the level of education their jobs require is below the level of education they have attained our results indicate that overeducated workers have less experience decreased on thejob training and higher turnover than other comparable workers we also observe an improvement in the job match over age and mobility

decentralization and economic growth in europe for whom the bell tolls the effects of fiscal decentralization on economic growth are analyzed a theoretical framework is developed that builds on the relationships between government size and growth and between decentra

job matching and job competition are lower educated workers at the back of job queues abstract during the cyclical downturn of the 1980s unemployment in the netherlands increased substantially with unemployment rates of lower educated workers increasing more than those of higher educated workers a possible explanation of this phenomenon is job competition between workers with different levels of education another explanation of the diverging unemployment rates is that employers dismiss replaceable lower educated workers before irreplaceable higher educated workers in this paper we scrutinize the job competition explanation our results show that there only is job competition between unemployed workers with an academic and a higher vocational education there is no job competition at lower levels of education

reconciling the evidence of card and krueger 1994 and neumark and wascher 2000 we employ the original card and krueger american economic review 1994 84 772 793 and neumark and wascher american economic review 2000 90 1362 1396 data together with the changes in changes estimator to re examine the evidence for the effect of minimum wages on employment our study reconciles the controversial positive average employment effect reported by the former study and the negative average employment effect reported by the latter study our main finding which is supported by both datasets is that the controversial result remains valid only for small fast food restaurants copyright 2011 john wiley sons ltd

a simple model of commodity taxation and cross border shopping this paper sets up a simple model in which two countries differing in geographical extent engage in commodity tax competition originating in opportunities for cross border shopping the non cooperative tax equilibrium and various coordination initiatives are examined in the benchmark model and in two model extensions incorporating i costs of transportation for goods and ii border inspection among the more surprising results are the following with i pure profits accrue to sellers near the border but subjecting them to tax may lower the country s total tax revenue with ii the volume of cross border shopping may well increase jel classification h20 h87 h26

regional impact of changes in disposable income on spanish electricity demand a spatial econometric analysis this paper presents an empirical analysis of residential electricity demand considering the existence of spatial effects this analysis has been performed using aggregate panel data at the province level for 46 spanish provinces for the period from 2001 to 2010 for this purpose we estimated a log log demand equation using a spatial autoregressive model with autoregressive disturbances sarar the purpose of this empirical analysis is to determine the influence of price income and spatial spillovers on residential electricity demand in spain we are particularly interested in analyzing the impact of household disposable income variation across provinces observed during the economic crisis period 2009 2010 the estimation results show relatively low income elasticity and an inelastic demand to prices furthermore the results show the presence of spatial effects in spanish residential electricity consumption

inter regional insurance this paper considers the problem facing a central government which can insure regional governments by use of intergovernmental grants against region specific and privately observed shocks either to income or demand for or cost of the public good notable results are i depending on the source of the shock the grant may induce over or undersupply of the public good relative to the samuelson rule ii with public good spillovers between regions there is two way distortion of public good supply that is qualitatively different distortions relative to the samuelson rule for different values of the shock iii the solution to the central government s problem may depend qualitatively on whether regional taxation is lump sum or distortionary 1999 elsevier science s a all rights reserved

the provision of local public goods and factors in the presence of firm and household mobility abstract this paper studies the efficiency properties of allocations when firms and households are mobile and when local governments provide local public goods and local public factors the analysis differentiates between immobile land owners and perfectly mobile workers and concludes that an efficient allocation is obtained if there is no outflow of land rents to absentee owners if rents flow out only local public goods are supplied in accordance with the samuelson rule the provision of local public factors is inefficiently low however and jurisdictions tax mobile firms and mobile households inefficiently high in order to restrict the outflow of rents an optimal intervention scheme is derived in this case we also analyze the distortions that result when the non availability of local head taxes makes it impossible to internalize crowding costs

identifying strategic interactions in swedish local income tax policies abstract this paper uses data on swedish local governments to test for strategic interaction in local tax setting we make use of a number of indirect predictions from the theories of tax competition and yardstick competition in order to test for the presence of strategic interaction in these forms using such additional predictions of the theories serves a twofold purpose first it helps us establish if the spatial coefficient is due to strategic interactions or merely reflecting spatial error correlation and second it helps identify the source of interaction the analysis provides strong evidence for spatial correlation in tax rates among swedish local governments moreover we find weak evidence of tax competition effects in the setting of tax rates

user cost changes unemployment and home ownership evidence from spain this paper develops a macroeconomic model that permits analysis of the relationship between unemployment and home ownership rates using aggregate data at the provincial level within spain besides other influential variables such as the changes of the relative user costs of owning and renting or household life cycle attributes the model constructed permits the authors to question the evidence of oswald nickell and layard and partially of green and hendershott that home ownership leads to higher unemployment the results point out that taking into account the simultaneity determination issue and reducing the omitted variable bias a higher unemployment discourages home ownership

soft budget constraints and strategic interactions in subnational borrowing evidence from the german states 1975 2005 abstract cooperative federations are usually characterized by the existence of bailout guarantees and intergovernmental transfer schemes this paper explores whether such features of cooperative federations lead to subnational soft budget constraints using panel data from the german states covering the 1975 2005 period the methodology is based on the premise that subnational governments borrowing will exhibit vertical and horizontal strategic interactions if they operate under soft budget constraints therefore a test for strategic interactions in subnational borrowing can be used to infer whether a cooperative federation like germany is susceptible to soft budget constraints the results suggest that state borrowing in germany exhibited horizontal but not vertical interactions during the time frame of the analysis this indicates i that german states faced soft budget constraints and ii that they were more concerned about the likelihood of a bailout than about its volume

the politics of digits evidence of odd taxation from the concept of odd pricing i e setting rightmost price digits below a whole number this paper advances the political counterpart of odd taxation using a panel of danish municipal taxes first the distribution of tax decimals is non uniform and resembles the distribution of price endings data second nine ending and other higher end decimals are found to be over represented which echoes odd pricing research it suggests that incumbents take voters biases into account and apply odd taxes to minimize the political costs of taxation while maximizing revenue attention should be given to how policy digits are arranged to exploit voters cognitive biases

local public works and intergovernmental transfers under asymmetric information abstract this paper studies local public works decisions in a hierarchical setting under bidimensional asymmetric information a local authority plans to undertake a public work and delegates its construction to a firm the federal government decides whether to fund the project without being informed of either the project s benefit or the constructor s efficiency the local authority knows these values to deal with this informational gap the federal government designs a public work contract specifying transfers to the local authority and to the firm we show under which circumstances cost sharing and compensations emerge as incentive devices then we identify which projects are effectively constructed more works with low high benefits are undertaken shut down than under full information

spatial patterns in local taxation tax mimicking or error mimicking this paper tests for mimicry in local tax setting by using a panel data set of the english non metropolitan districts in the 1980s when property tax rate variability across districts was highest the results confirm the presence of large and significant spatial interactions among districts even after allowing for district specific and time effects a district appears to be significantly affected by its neighbours policies a 10 increase in the local property tax rate of a district s neighbours leads to an increase of 4 5 in its own property tax rate on the other hand the absence of correlation in tax rates between lower tier district authorities and upper tier county authorities suggests that the spatial pattern in district tax rates is not simply driven by spatially auto correlated shocks

china s macroeconomic performance and management during transition since reforms started in 1978 china has combined rapid growth with moderate price stability this paper analyzes china s macroeconomic performance over the past fifteen years with special attention to factors responsible both for the pace of economic expansion and the periodic fluctuations regarding the former the author identifies four sources of stimuli administrative decentralization high levels of fixed capital investment the elastic supply and quality of the labor force and the increasing volume of savings supplemented in recent years by a large inflow of foreign direct investment future growth with stability calls for controlling and implementing banking and fiscal reform

spillover effects in local public spending abstractthis paper investigated the fiscal interactions between italian municipalities over the period 2001 11 and found a positive horizontal interdependence in spending decisions the results are robust to different specifications of the spatial neighbours and are confirmed by a natural experiment an earthquake in the abruzzo region of italy in 2009 that creates an exogenous variation in the neighbours spending furthermore there is no evidence of yardstick competition when one considers political effects while a negative relationship is found between spatial interaction and the size of the municipality thus it can be concluded that spillover effects drive the strategic interactions in spending decisions

recent theoretical work on the soft budget constraint the soft budget constraint is a syndrome that was identified and studied by janos kornai in his analysis of centrally planned economies see kornai 1980 the syndrome is said to arise when a seemingly unprofitable enterprise is bailed out by the government or the enterprise s creditors in other words the enterprise is not held to a fixed budget but finds its budget constraint softened by the infusion of additional credit when it is on the verge of failure kornai viewed the soft budget constraint as a crucial ingredient for explaining the salient features of socialist economic performance in particular the pervasiveness of shortages one interesting puzzle is why centrally planned economies have been particularly susceptible to the influence of the soft budget constraint the capitalist world is hardly immune as the recent financial crisis in asia attests but on the whole it has proved less vulnerable indeed the very origin of the soft budget constraint and the mechanism by which it gives rise to shortages and other undesirable effects are also obviously important questions although kornai s work has long been well known and appreciated answers to these associated theoretical questions have been hazarded only recently in maskin 1996 i surveyed some of the initial efforts in this direction including mathias dewatripont and maskin 1995 which argues that centralization of credit can give rise to soft budget constraints because it facilitates the refinancing of

local fiscal competition an application to sales taxation with multiple federations abstract local sales tax rates influence the location of retail activity this paper develops a theory and empirical identification strategy for studying sales tax competition with multiple federations as exemplified by multiple counties each containing several cities in addition to strategic interactions with nearby cities and a city s own county city tax rates are influenced by the tax rates of neighboring counties cities react heterogeneously to own county sales tax rates depending on distance to the county border using data on the driving time to county borders and a comprehensive cross section of local sales tax rates i exploit variation in proximity to county borders to identify vertical fiscal competition cities located near county borders react more intensely to their county s tax rate in comparison to towns at the interior an increase in the neighboring county tax rate raises city tax rates in nearby counties

spatial fiscal interactions among french municipalities within inter municipal groups based on a unique data set of french municipalities and a large number of budgetary variables we estimate the extent of spatial fiscal interaction among the 33 484 french municipalities in 2008 by accounting for inter municipal cooperation using a spatial autoregressive model with inter municipal group fixed effects we show that spatial interactions among french municipalities are inflated by correlated effects that affect similarly municipalities that cooperate together removing these confounding effects leads to considerably smaller positive spatial interactions for tax decisions and even negative ones for capital expenditures in addition we observe a clear distinction between complementary choices on current budget items and substitutable choices on capital budget items

measurement of repressed inflation in china abstract we estimate a measure of the repression of the chinese price level by developing a simple analytical model which derives a true rate of inflation on the basis of the different rates of change of the stock of money in circulation and the nominal value of retail sales this true rate of inflation is then used to explain changes in quasi money balances we estimate this model for the period 1979 1988 using quarterly data the results strongly support the hypothesis of repressed inflation the annual rate of inflation of the true price index is approximately 12 4 percent higher than that of the official price index over the 10 year period

in search of yardstick competition a spatial analysis of italian municipality property tax setting this paper uses italian local government data to test for fiscal interaction arising from yardstick competition to discriminate yardstick competition from competing theories of strategic interaction we account for the incentives and constraints generated by the electoral system in particular for the presence of term limits and the size of the majorities supporting the mayors estimation of a local property tax setting equation uncovers positive spatial auto correlation in local tax rates of jurisdictions where the mayors run for re election in uncertain contests while interaction is absent where either mayors face a term limit or are backed by large majorities

pigou tiebout property taxation and the underprovision of local public goods abstract pigou s proposition that the use of distorting taxes rather than neutral head taxes reduces public service levels is examined in this paper a simple model with a national system of competing local governments is utilized to demonstrate that the use of a distorting property tax on mobile capital decreases the level of residential public services the case where public services are an intermediate producer good is also considered

is executive compensation a substitute governance mechanism to debt financing and leasing this study examines whether and how ceo equity incentives relate to financing choices i e debt and leases using manually collected ceo compensation and lease data for a sample of large uk firms we found evidence of a negative relationship between ceo equity incentives and firm leverage we also found that ceo equity incentives and leases are negatively related the results are consistent with the theory introduced in this study on the substitutability of executive compensation and firm s debt lease financing our findings represent fresh empirical evidence and renewed interpretation regarding the relationship between executive equity based incentives and firm s financing choices the substitutability theory we introduced here suggests that firms with greater use of debt and or leases will implement less equity based compensation in mitigating the agency cost of equity

top management compensation and capital structure the interrelationship between top management compensation and the design and mix of external claims issued by a firm is studied the optimal managerial compensation structures depend on not only the agency relationship between shareholders and management but also the conflicts of interests which arise in the other contracting relationships for which the firm serves as a nexus we analyze in detail the optimal management compensation for the cases when the external claims are 1 equity and risky debt and 2 equity and convertible debt in addition to the role of aligning managerial incentives with shareholder interests managerial compensation in a levered firm also serves as a precommitment device to minimize the agency costs of debt the optimal management compensation derived has low pay performance sensitivity with convertible debt instead of straight debt the corresponding optimal managerial compensation has high pay to performance sensitivity a negative relationship between pay performance sensitivity and leverage is derived our results provide a reconciliation of the puzzling evidence of jensen and murphy 1990 with agency theory other testable implications include 1 a relationship between the risk premium in corporate bond yields and top management compensation structures and 2 the announcement effect of adoption of executive stock option plans on bond prices the model yields implications for management compensation in banks and federal deposit insurance reform our results explain the dynamics of top management compensation in firms going through financial distress and reorganization

operating lease decision and the impact of capitalization in a bank oriented country abstractthis article explores the reasons why firms engage in operating leases and examines the potential impact of a change in the related accounting rules we focus on the accounting advantage of off balance financing which does not affect the typical accounting based covenants especially important in bank oriented countries however we also consider other economically based arguments using manually collected operating lease data for spanish listed firms we use the constructive capitalization method to measure as if liabilities the results confirm that not only size and industry affect the decision but that firms closer to breaching their covenants are also more inclined to choose operating leases consequently it is argued that such firms will be more affected by the accounting change indeed the inclusion of liabilities in the balance sheet might tighten financial covenants in loan agreements as evidenced in the paper not surprisingly firms are strongly opposed to the accounting change

the effects of minimum bargained wages on earnings evidence from spain abstract this paper provides an empirical evaluation of the effects of spanish sectoral collective bargaining on wages for this purpose we use a sample of workers for whom bargained wage rates and earnings are available using a variant of the meyer and wise approach we are able to estimate wage gains due to minimum bargained wages and their employment effects the most relevant conclusion is that there is evidence of a sword of justice effect by unions but this is limited by non compliance among unskilled workers and the non binding nature of bargained wages for skilled workers

on the job search in a matching model with heterogeneous jobs and workers this paper considers a matching model with heterogenous jobs unskilled and skilled and workers low and high educated which allows for on the job search by mismatched workers the latter are high educated workers who transitorily accept unskilled jobs and continue to search for skilled jobs our findings show that on the job search introduces an additional source of between and within group wage inequality furthermore the higher quit rate of mismatched workers exerts a negative externality on unskilled jobs and weakens the labour market position of low educated workers this last feature changes the effects of skill biased technological change and it alters the response of the labour market to shifts in the skill distribution this paper has been written for presentation as an invited lecture at the annual conference of the european association of labour economics eale 2003 seville 18 21 september 2003 we are very grateful to maite blazquez for excellent research assistance we also wish to thank barbara petrongolo participants in seminars at uc3m core essex and lse for helpful comments and especially j albrecht for his insightful discussion on a preliminary draft of this paper the usual disclaimer applies

redistribution in a decentralized economy growth and inflation in china under reform despite expanding at an annual rate of nearly 9 percent china s economy has exhibited a marked cyclical pattern periods of rapid growth accompanied by accelerating inflation are followed by contractions during which both growth and inflation fall a widening gap also emerged between the output contribution of the state sector and its share of investment and employment in this paper we offer a consistent explanation for this behavior that reflects several key institutional features of china s economic reform i economic decentralization ii the government s commitment to the state sector and iii the credit plan and credit control

yardstick competition in intergovernmental relationships theory and empirical predictions abstract we review yardstick competition theory as applied to fiscal choices in the intergovernmental context we show that the theory is consistent with opposite results concerning neighbouring governments fiscal behaviour and discuss some empirical implications

zhu rongji might be right understanding the mechanism of fast economic development in china understanding the facilitating role of regional governments and the source of regional competition is the key to demystifying the success of china s fast economic development since the 1990s this paper as the product of the lecture the author delivered at the world economy china annual lecture on 3 november 2011 at university of nottingham provides a framework that better illustrates the mechanism that motivates china s economic growth over the past 20 years it shows that the current growth mechanism in china is largely the result of institutional reforms and fiscal recentralisation that occurred in 1994 under the leadership of premier zhu rongji being allowed to have their own source of tax revenue under the new fiscal reform chinese regional governments are motivated to pursue the goal of economic growth through fast capital formation and industrialisation the newly designed intergovernmental fiscal relationship as the most important reform programme in china has also helped create a growth incentive that is compatible between central and local governments and resulted in a tibout type regional competition in the sense that inefficient use of resources including public land would be substantially eliminated by the strategic behaviour of regional governments being more attractive to external direct investment such regional competition makes the regional governments preserve and use the markets rather than replace them and has generated consistent and powerful development momentum for the post 1994 economy of china