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

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April 2016, 12(2): 487-504. doi: 10.3934/jimo.2016.12.487

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

Xiangyu Ge ^1, , Tifang Ye ^1, , Yanli Zhou ^2, and Guoguang Yan ^1,

1.	School of Statistics and Mathematics, Zhongnan University of Economics and Law, Wuhan 430073, China, China, China
2.	School of Finance, Zhongnan University of Economics and Law, Wuhan 430073, China

Received October 2014 Revised February 2015 Published June 2015

Abstract
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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.

Keywords: tax competition, spillovers, heterogeneous economies., Fiscal decentralization.

Mathematics Subject Classification: Primary: 90C90; Secondary: 49J15, 49L2.

Citation: Xiangyu Ge, Tifang Ye, Yanli Zhou, Guoguang Yan. Fiscal centralization vs. decentralization on economic growth and welfare: An optimal-control approach. Journal of Industrial and Management Optimization, 2016, 12 (2) : 487-504. doi: 10.3934/jimo.2016.12.487

References:

[1]	R. Barro, Government spending in a simple model of endogenous growth, Journal of Political Economics, 98 (1990), 103-125.
[2]	T. Besley and S. Coate, Centralization versus decentralization provision of local public goods: a political economy approach, Journal of Public Economics, 87 (2003), 2611-2637.
[3]	T. Besley and M. Smart, Does tax competition raise voter welfare? CEPR Discussion Paper: No. 3131 (2002).
[4]	G. Brennan and J. M. Buchanan, The Power to Tax: Analytical Foundations of a Fiscal Constitution, Cambridge University Press, New York, 1980.
[5]	J. K. Brueckner, Fiscal federalism and economic growth, Journal of Public Economics, 90 (2006), 2107-2120. doi: 10.1016/j.jpubeco.2006.05.003.
[6]	S. Bucovetsky, Asymmetric tax competition, Journal of Urban Economics, 30 (1991), 167-181. doi: 10.1016/0094-1190(91)90034-5.
[7]	H. B. Cai and D. Treisman, Does competion for capital discipline governments? Decentralization, globalization and public policy? American Economic Review, 95 (2005), 817-830.
[8]	S. M. Calabrese, D. N. Epple and R. E. Romano, Inefficiencies from metropolitan political and fiscal decentralization: failure of tiebout competition, Review of Economic Studies, 79 (2012), 1081-1111. doi: 10.1093/restud/rdr048.
[9]	F. Cerniglia and R. Longaretti, Federalism, education-related public good and growth when agents are heterogeneous, Journal of Economics, 109 (2013), 271-301. doi: 10.1007/s00712-012-0298-0.
[10]	A. C. Chu and C. C. Yang, Fiscal centralization versus decentralization: growth and welfare effects of spillovers, Leviathan taxation, and capital mobility, Journal of Urban Economics, 71 (2012), 177-188. doi: 10.1016/j.jue.2011.10.003.
[11]	J. Edwards and M. Keen, Tax competition and Leviathan, European Economic Review, 40 (1996), 113-134. doi: 10.1016/0014-2921(95)00057-7.
[12]	X. X. Huang, X. Q. Yang amd K. Teo, A smoothing scheme for optimization problems with max-min constraints, Journal of Industrial and Management Optimization, 3 (2007), 209-222. doi: 10.3934/jimo.2007.3.209.
[13]	J. Liu, K. C. Yiu and K. Teo, Optimal investment-consumption problem with constraint, Journal of Industrial and Management Optimization, 9 (2013), 743-768. doi: 10.3934/jimo.2013.9.743.
[14]	B. Lockwood, Fiscal decentralization: a political economy perspective, in E. Ahmad, G. Brosio, Handbook of Fiscal Federalism Edward Elgar, 2006.
[15]	W. E. Oates, Fiscal Federalism, Harcourt Brace Jovanovich, New York, 1972.
[16]	M. Rauscher, Leviathan and competition among districts: the case of benefit taxation, Journal of urban economics, 44 (2000), 59-67.
[17]	M. Rauscher, Interdistrictal competition and public-sector prodigality: the triumph of the market over the state? FinanzArchiv, 57 (2000), 89-105.
[18]	M. Rauscher, Economic growth and tax-competition Leviathans, International Tax and Public Finance, 12 (2005), 457-474.
[19]	C. M. Tiebout, A pure theory of local expenditures, Journal of Political Economy, 64 (1956), 416-424. doi: 10.1086/257839.
[20]	S. Voigt and L. Blume, The economic effects of federalism and decentralization: a cross-country assessment, Public choice, 151 (2012), 229-254. doi: 10.1007/s11127-010-9745-z.

show all references

References:

[1]	R. Barro, Government spending in a simple model of endogenous growth, Journal of Political Economics, 98 (1990), 103-125.
[2]	T. Besley and S. Coate, Centralization versus decentralization provision of local public goods: a political economy approach, Journal of Public Economics, 87 (2003), 2611-2637.
[3]	T. Besley and M. Smart, Does tax competition raise voter welfare? CEPR Discussion Paper: No. 3131 (2002).
[4]	G. Brennan and J. M. Buchanan, The Power to Tax: Analytical Foundations of a Fiscal Constitution, Cambridge University Press, New York, 1980.
[5]	J. K. Brueckner, Fiscal federalism and economic growth, Journal of Public Economics, 90 (2006), 2107-2120. doi: 10.1016/j.jpubeco.2006.05.003.
[6]	S. Bucovetsky, Asymmetric tax competition, Journal of Urban Economics, 30 (1991), 167-181. doi: 10.1016/0094-1190(91)90034-5.
[7]	H. B. Cai and D. Treisman, Does competion for capital discipline governments? Decentralization, globalization and public policy? American Economic Review, 95 (2005), 817-830.
[8]	S. M. Calabrese, D. N. Epple and R. E. Romano, Inefficiencies from metropolitan political and fiscal decentralization: failure of tiebout competition, Review of Economic Studies, 79 (2012), 1081-1111. doi: 10.1093/restud/rdr048.
[9]	F. Cerniglia and R. Longaretti, Federalism, education-related public good and growth when agents are heterogeneous, Journal of Economics, 109 (2013), 271-301. doi: 10.1007/s00712-012-0298-0.
[10]	A. C. Chu and C. C. Yang, Fiscal centralization versus decentralization: growth and welfare effects of spillovers, Leviathan taxation, and capital mobility, Journal of Urban Economics, 71 (2012), 177-188. doi: 10.1016/j.jue.2011.10.003.
[11]	J. Edwards and M. Keen, Tax competition and Leviathan, European Economic Review, 40 (1996), 113-134. doi: 10.1016/0014-2921(95)00057-7.
[12]	X. X. Huang, X. Q. Yang amd K. Teo, A smoothing scheme for optimization problems with max-min constraints, Journal of Industrial and Management Optimization, 3 (2007), 209-222. doi: 10.3934/jimo.2007.3.209.
[13]	J. Liu, K. C. Yiu and K. Teo, Optimal investment-consumption problem with constraint, Journal of Industrial and Management Optimization, 9 (2013), 743-768. doi: 10.3934/jimo.2013.9.743.
[14]	B. Lockwood, Fiscal decentralization: a political economy perspective, in E. Ahmad, G. Brosio, Handbook of Fiscal Federalism Edward Elgar, 2006.
[15]	W. E. Oates, Fiscal Federalism, Harcourt Brace Jovanovich, New York, 1972.
[16]	M. Rauscher, Leviathan and competition among districts: the case of benefit taxation, Journal of urban economics, 44 (2000), 59-67.
[17]	M. Rauscher, Interdistrictal competition and public-sector prodigality: the triumph of the market over the state? FinanzArchiv, 57 (2000), 89-105.
[18]	M. Rauscher, Economic growth and tax-competition Leviathans, International Tax and Public Finance, 12 (2005), 457-474.
[19]	C. M. Tiebout, A pure theory of local expenditures, Journal of Political Economy, 64 (1956), 416-424. doi: 10.1086/257839.
[20]	S. Voigt and L. Blume, The economic effects of federalism and decentralization: a cross-country assessment, Public choice, 151 (2012), 229-254. doi: 10.1007/s11127-010-9745-z.

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