Gonzalez, Paula, Hindriks, Jean, Lockwood, Ben and Porteiro, Nicolas (2006) Political budget cycles and fiscal decentralization. Working Paper. University of Warwick, Department of Economics, Coventry.

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Abstract

In this paper, we study a model à la Rogoff (1990) where politicians distort fiscal policy to signal their competency, but where fiscal policy can be centralized or decentralized. Our main focus is on how the equilibrium probability that fiscal policy is distorted in any region (the political budget cycle, PBC) differs across fiscal regimes. With centralization, there are generally two effects that change the incentive for pooling behavior and thus the probability of a PBC. One is the possibility of selective distortion: the incumbent can be re-elected with the support of just a majority of regions. The other is a cost distribution effect, which is present unless the random cost of producing the public goods is perfectly correlated across regions. Both these effects work in the same direction, with the general result that overall, the PBC probability is larger under centralization (decentralization) when the rents to office are low (high). Voter welfare under the two regimes is also compared: voters tend to be better off when the PBC probability is lower, so voters may either gain or lose from centralization. Our results are robust to a number of changes in the specification of the model.

Item Type:	Working or Discussion Paper (Working Paper)
Subjects:	H Social Sciences > HC Economic History and Conditions
Divisions:	Faculty of Social Sciences > Economics
Library of Congress Subject Headings (LCSH):	Budget, Fiscal policy, Decentralization in government
Series Name:	Warwick economic research papers
Publisher:	University of Warwick, Department of Economics
Place of Publication:	Coventry
Date:	March 2006
Number:	No.742
Number of Pages:	36
Status:	Not Peer Reviewed
Access rights to Published version:	Open Access
Version or Related Resource:	Gonzalez, P., et al. (2006). Political budget cycles and fiscal decentralization. [Louvain]: Département des Sciences Économiques de l'Université catholique de Louvain. (Core discussion paper, 2006/31).
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URI:	http://wrap.warwick.ac.uk/id/eprint/272

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