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Fiscal centralization vs. decentralization on economic growth and welfare: An optimal-control approach

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  • In this paper, we study the economic growth and social welfare in an endogenous growth model with spillovers of public goods, leviathan taxation and imperfectly flow capital in heterogeneous economies. We show that the effect of spillovers and capital flow on economic growth and welfare is different for well endowed region and poorly endowed region under fiscal centralization and fiscal decentralization. We also show that a decentralized system dominates a centralized system in terms of economic growth no matter whether the region is well or poorly endowed. However, the difference between a decentralized system and a centralized system is ambiguous in social welfare. It is dependent on the degree of spillovers and capital flow no matter whether the region is well or poorly endowed.
    Mathematics Subject Classification: Primary: 90C90; Secondary: 49J15, 49L20.


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