This paper is a selective survey of fiscal federalism. Fiscal federalism defines the complex financial relationship between federal or central governments and individual state or local governments. Pdf toward a secondgeneration theory of fiscal federalism. Fiscal federalism is concerned with understanding which functions and instruments are best centralized and which are best placed in the sphere of decentralized levels of government oates, s. The study has critically analysed the first generation theory and second generation theory of fiscal federalism. Federalism, regional redistribution, and country stability. Published in volume 37, issue 3, pages 11201149 of journal of economic literature, september 1999, abstract. Fiscal federalism and national integration in nigeria.
Pdf old and new theories of fiscal federalism, organizational. Zax, examine the distribution of power and responsibilities among the various levels of government. Fiscal federalism, financial relations between units of governments in a federal government system. An essay on fiscal federalism 1121 my purpose in this essay is not to provide a comprehensive survey of fiscal federalism. Monograph analysing concept of a fiscal federalism in which taxation and debt finance in a federal system is dealt with. The term was introduced by the germanborn american economist richard musgrave in 1959. Pdf an essay on fiscal federalism semantic scholar. On the evolution of fiscal federalism national tax association. Wallace e oates monograph analysing concept of a fiscal federalism in which taxation and debt finance in a federal system is dealt with. Oates, was published in his honor in 1999, 2 and an additional volume of his selected essays in 2004. Current structure of fiscal federalism in nigeriaa legacy of military rule 4. Fiscal federalism is part of broader public finance discipline.
We are grateful to our discussant, james hines, and to the other participants of the nber conference on fiscal federalism for some very helpful comments on an earlier draft of this paper. This reprinted edition includes a new preface that briefly describes the origins of the book and comments on the evolution of the theory and practice of fiscal federalism since its publication. His first book was fiscal federalism 1972 and he authored numerous other books and articles, including the theory of. On the theory and practice of fiscal decentralization wallace e. This pdf is a selection from an outofprint volume from the national bureau of economic research. Studies in fiscal federalism economists of the twentieth century by oates, wallace e. Old and new theories of fiscal federalism, organizational design problems, and tiebout.
For the use of the term fiscal federalism as applied to scotland, see full fiscal autonomy for scotland. Oates march 21, 1937 october 30, 2015 was a distinguished university professor of economics at the university of maryland he taught in the fields of public economics and environmental economics, and was considered a major international figure in both fields. Toward a secondgeneration theory of fiscal federalism. Wallace oates was a distinguished university professor emeritus at the university of maryland and a university fellow at resources for the future. This article describes the theories of fiscal federalism and the history of the literature. The term was originally coined by ralph musgrave, a us economist, in 1959, followed by wallace oates 1972.
On the theory and practice of fiscal decentralization. Theories of public economy can be approached in two ways. Such a system, however, is open to a great deal of duplication and confusion in. National taxation, fiscal federalism and global taxation. A recent empirical literature explores a different effect of fiscal federalism by studying the impact of decentralized public spending on economic growth. Principles of fiscal federalism 5 preferences in public services, political participation, innovation, and accountability. This ex pansion of the relative role of the states would seem not to be purely politically motivated. The wallis oates paper provides a broad historical perspective on the extent and evolution of fiscal decentralization in the state and local sector. The analysis shows that federalism, which allows publicgood levels to be tailored to suit the differing demands of young and old consumers, who live in different jurisdictions, increases the incentive to save. Since his first book, fiscal federalism 1972, he explored the assignment of functions to different levels of government in a federal system, the provision of local public goods, the design of intergovernmental grants, and the structure of local revenue systems. The welfare gains from fiscal federalism accrue due to several reasons.
Oates is a professor of economics at the university of maryland and a university fellow with resources for the future. For overviews of the literature on fiscal federalism, see wildasin 1986 and oates 1999. He received his phd in economics at stanford in 1965 and joined the faculty at princeton university. Toward a secondgeneration theory of fiscal federalism article pdf available in international tax and public finance 124. New york, harcourt brace jovanovich 1972 dlc 78185772 ocolc277959. Fiscal federalism and the managment of resources 4 1. Fiscal federalism and economic growth sciencedirect. Fiscal federalism has been the subject of debate in the us for a number of years, perhaps not surprisingly. Oates is professor of economics at the university of maryland, where he is also a member of the bureau of business and economic research. Pranab bardhan is professor of economics, university of california, berkeley, california. An essay on fiscal federalism 1123 some further analysis, for providing some insights into the determinants of the magnitude of the welfare gains from fiscal decentralization oates 1998. First, we attempt to state the rules and principles that make for an efficient conduct of.
He has written widely on environmental affairs and is coauthor of the theory of environmental policy and author of the economics of environmental regulation. Drawing on a wide range of literature and ideas, a new secondgeneration theory of fiscal federalism is emerging that provides new insights into the structure and working of federal systems. The recent scholarship has made distinction between two generations of literature in fiscal federalism. This inquiry was inspired in part by the work of oates 1993, who conjectured that better targeting of growthenhancing infrastructure investment under federalism could raise an economys. An essay on fiscal federalism american economic association. Pranab bardhan pranab bardhan is professor of economics. This paper uses an endogenousgrowth model with overlapping generations to explore the connection between fiscal federalism and economic growth. An analysis prakash chandra jha amity university rajasthan, jaipur abstract. Nov 27, 2015 the recent scholarship has made distinction between two generations of literature in fiscal federalism. One segment of this literature contends that competition among governments leads to the underprovision of public services. The presumption in favor of decentralized finance is established by simply assuming that centralized provision will entail.
First, it establishes context by introducing the two classic motivations in support of federalism, namely, incentives and knowledge. The ordinary least square ols technique is adopted. As the decentralisation theorem demonstrates, fiscal federalism ensures that public services are provided corresponding to the diversified demand conditions in a federation oates, 1972. The first three papers, by john joseph wallis and wallace e. Fiscal federalism is a general normative framework for the assignment of functions to the different levels of. Oates the traditional theory of public finance has made a strong case for a major role for fiscal decentralization. Fiscal competition and its implications a direct challenge to the fiscal federalism prescription has emerged in some of the literature on fiscal competition. Over two decades ago in an empirical study of fiscal federalism oates, 1972, i found, for a sample of 58 countries, that measures of fiscal centrali. Brazil is the only federation practising this form of federalism. His first book was fiscal federalism 1972 and he authored numerous other books and articles, including the theory of environmental policy 1975, coauthored with william j. The competitive federalism model is a theoretical construct advanced by the fiscal federalism literature and not yet practised anywhere in its pure form. Fiscal federalism deals with the division of governmental functions and financial relations among levels of government. Dickson abstract the objective of this paper is to investigate the effects of fiscal federalism on economic welfare in nigeria between 1970 and 2009 using an econometric approach.
Fiscal federalism is the analysis of the problems that give rise to, and arise from, the existence of more than one level of government within the same geographical area. Oates 1999 makes the point that fiscal federalism implies a rather narrow concern with budgetary matters. As originally developed by musgrave 1959 and oates 1972, the theory of fiscal federalism concerns the division of publicsector functions and finances in a logical way among multiple layers of government king 1984. The distinction between fgff and sgff parallels that made by musgrave 1959,4. This work is a contribution to the second generation theory sgt of fiscal federalism that studies fiscal federalism through contemporary economic and industrial organization theory. Introduction fiscal federalism, under which provision of public goods is decentralized to subnational governments, allows public consumption levels to be tailored to suit the preferences of a heterogeneous population. Introducing some basic assumptions concerning the behavior of public agents and specifying more carefully the system of political institutions, this second strand of new theory offers an enriched view of on the evolution of fiscal federalism.
Second generation fiscal federalism 3 1 also in this approach is the work of congleton, kyriacou, and bacaria 2003, cremer and palfrey 2002, iaryczower, saiegh, and to mmasi 2000, jones, sanguinetti, and tomasi 1999, kenny and winer 2006. The recent scholarship has made distinction between two generation of literature in fiscal federalism. These fiscal externalities give rise to inefficiencies in the allocation of resources both within and across jurisdictions dahlby 1996. Assignment of responsibilities and fiscal federalism. It then explores a series of important topics that are the subject of current research. Though the latter approaches the problem of fiscal federalism from different perspectives, it does not challenge but complements the former. Needs, sources and untilization, princeton university press, princeton, nj. Toward a secondgeneration theory of fiscal federalism wallace e. A brief tour through the history of nigerian federalism reveals sharp turning points in federal and regional fiscal relations, based alternately on principles of derivation, national interest, and the centripetal forces of military governments3. Of course, offsetting these adverse consequences of decentralization are the benefits oates 1999. This case is based on an improved allocation of resources in the public sector. As a subfield of public economics, fiscal federalism is concerned with understanding which functions and instruments are best centralized and which are best placed in the sphere of decentralized levels of government oates, 1999. As originally developed by musgrave 1959 and oates 1972, the theory of fiscal federalism con. According to this construct, all orders of government should have.
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