How do local governments decide on public policy in fiscal federalism? Tax vs. expenditure optimization

Research output: Contribution to journalJournal articlepeer-review

  • Marko Köthenbürger
Previous literature widely assumes that taxes are optimized in local public finance while expenditures adjust residually. This paper endogenizes the choice of the optimization variable. In particular, it analyzes how federal policy toward local governments influences the way local governments decide on public policy. Unlike the usual presumption, the paper shows that local governments may choose to
optimize over expenditures. The result holds when federal policy subsidizes local taxation. The results offer a new perspective of the efficiency implications of federal policy toward local governments and, thereby, enable a more precise characterization of local government behavior in fiscal federalism.
Original languageEnglish
JournalJournal of Public Economics
Volume95
Issue number11-12
Pages (from-to)1516-1522
Number of pages7
ISSN0047-2727
DOIs
Publication statusPublished - 2011

ID: 36077817