Institutional Competition

Institutional Competition

New Thinking in Political Economy series

Edited by Andreas Bergh and Rolf Höijer

Why is competition between institutions usually viewed in a negative light, when competition is considered positive in most other economic contexts? The contributors to this volume introduce new perspectives on this issue, analytically and empirically exploring reasons for this perception.

Chapter 9: Fiscal Federalism and Economic Growth in OECD Countries

Lars P. Feld

Subjects: economics and finance, austrian economics, institutional economics


Lars P. Feld 9.1 INTRODUCTION In recent years, there has been a broad discussion as to the proper vertical organization of government in highly-developed and less-developed countries, in unitary states and federations alike. For instance, in the discussion of reforming German federalism, it is widely recognized that the inability to make reform decisions in Germany is partly the result of the ‘joint decision trap’ (Scharpf 1988) emerging from cooperative federalism, German style. Many observers propose the introduction of elements of competition to German federalism, in particular to give the states (Länder) the competence to levy a surcharge on personal and corporate income taxes (Feld 2004). The proponents of fiscal competition between sub-federal jurisdictions in Germany emphasize the beneficial impact this may have on the efficiency of public goods’ provision while opponents point to the undesired effects of fiscal competition on personal and regional income redistribution. Such arguments are not specific to Germany, but were also brought forward in the reform of Swiss fiscal federalism adopted in a referendum on 28 November 2004. Apart from the discussions in federations, decentralization processes continue in unitary states where similar arguments are rehearsed. Moreover, the benefits and costs of decentralization are also focused in studies on less-developed countries. While some authors argue that federalism or decentralization of state activity favour individual initiatives and serve as a market-preserving device (Weingast 1995), others emphasize the dangers arising from increasing corruption and local capture due to decentralization (Rodden and Rose-Ackerman 1997;...

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