Studies in Fiscal Federalism and State-local Finance series
Chapter 2: Overview: institutional approaches to fiscal imbalance and public indebtedness
In this chapter, I discuss the literature in political science and public economics concerned with the effects of decentralized budget decision making on fiscal performance. Above, I sketched out my theoretical approach, which is based on the assumption that institutions are of crucial importance for fiscal outcomes because they set policy incentives for rational self-interested politicians. Hence, I focus on the role of institutions. In doing so, I order the literature along conceptual lines. First, I concentrate on the budgetary institutions literature, which, by and large, argues that stronger centralization of decision-making processes at the national level and binding fiscal rules, together with improved transparency and a credible enforcement mechanism, enhance fiscal stability. Second, I provide an overview of the fiscal federalism literature that deals with the consequences of decentralizing budget-making authority along the vertical axis. In this literature, the decentralization of budget decisions is often thought to invite subnational CPR problems, posing a threat to overall fiscal stability over time. The purpose of the review is hence to present key concepts from both branches of literature that have evolved largely independent of one another, before I propose and test a new model (chapters 3 and 4).
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