Handbook of Multilevel Finance
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Handbook of Multilevel Finance

Edited by Ehtisham Ahmad and Giorgio Brosio

This Handbook explores and explains new developments in the “second generation” theory of public finance, in which benevolent rulers and governments have been replaced by personally motivated politicians and the associated institutions. Following a comprehensive introduction by the editors, the renowned contributors present fresh and original perspectives on the key multi-level issues, along with recent developments in theory and practice, as they relate to taxes, budget systems, the management of liabilities and macroeconomic stability. The book also explores special issues concerning the poor and marginalized, structural change and the environment, natural disasters, and the task of overcoming conflicts whilst keeping countries together.
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Chapter 6: Asymmetric federalism: constitutional and fiscal exchange and the political economy of decentralization

Roger D. Congleton


This chapter attempts to explain in economic and political terms the emergence of decentralized governance in general and of asymmetric federalism in particular. It also explores some general implications of asymmetric authority for government finance, service levels, and intergovernmental competition. The chapter is not a survey, but rather provides an overview of how and why asymmetries arise. A broad range of theoretical and empirical work on federalism is based on the implicit assumption that subnational governments within federal systems are more or less equally sized, equally influential, and equally autonomous. The assumption of homogeneous local governments seems to be based on the intuition that the production and distribution of public services by local governments have properties similar to those of competitive firms. At a competitive Tiebout equilibrium, each government at a given level of governance in a federal system tends to be that which provides services to its residents at least cost. Only efficiently-sized communities survive in a fiscally competitive environment, because least-cost producers of government services always attract residents and tax base away from less optimally sized jurisdictions. Consequently, all jurisdictions that produce the same mix of government services should be approximately the same efficient size, and a federal system will be composed of more or less homogeneous local governments. The Tiebout model is a useful benchmark for analyzing a variety of locational decisions in which production economies and competition may be presumed to play a dominant role in the local governments that emerge.

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