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Information transmission within federal fiscal architectures: theory and evidence


Dreher, Axel; Gehring, Kai; Kotsogiannis, Christos; Marchesi, Silvia (2015). Information transmission within federal fiscal architectures: theory and evidence. CIS Working Paper 85, University of Zurich.

Abstract

This paper explores the role of information transmission and misaligned interests across levels of governments in explaining variation in the degree of decentralization across countries. We analyze two alternative policy-decision schemes—‘decentralization’ and ‘centralization’— within a two-sided incomplete information principal-agent framework. The quality of communication depends on the conflict of interests between the government levels and on which government level controls the degree of decentralization. We show that the extent of misaligned interests and the relative importance of local and central government knowledge affect the optimal choice of policy-decision schemes. Our empirical analysis shows that countries’ choices depend on the relative importance of their private information. Importantly, the results differ significantly between unitary and federal countries, in line with our theory.

Abstract

This paper explores the role of information transmission and misaligned interests across levels of governments in explaining variation in the degree of decentralization across countries. We analyze two alternative policy-decision schemes—‘decentralization’ and ‘centralization’— within a two-sided incomplete information principal-agent framework. The quality of communication depends on the conflict of interests between the government levels and on which government level controls the degree of decentralization. We show that the extent of misaligned interests and the relative importance of local and central government knowledge affect the optimal choice of policy-decision schemes. Our empirical analysis shows that countries’ choices depend on the relative importance of their private information. Importantly, the results differ significantly between unitary and federal countries, in line with our theory.

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Additional indexing

Item Type:Working Paper
Communities & Collections:06 Faculty of Arts > Institute of Political Science
Dewey Decimal Classification:320 Political science
JEL Classification:H7, H77, D82, D83, C23
Uncontrolled Keywords:delegation, centralization, communication, fiscal decentralization, state and local government
Language:English
Date:October 2015
Deposited On:25 Nov 2015 15:55
Last Modified:16 Aug 2017 14:38
Series Name:CIS Working Paper
Number of Pages:56
ISSN:1662-7504
Free access at:Official URL. An embargo period may apply.
Official URL:http://www.cis.ethz.ch/content/dam/ethz/special-interest/gess/cis/cis-dam/Working_Papers/Working.Paper.85.pdf
Related URLs:http://www.cis.ethz.ch/research/working-papers.html
http://www.cis.ethz.ch/content/dam/ethz/special-interest/gess/cis/cis-dam/Working_Papers/Working.Paper.85.pdf

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