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Information transmission within federal fiscal architectures: Theory and evidence
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Information transmission within federal fiscal architectures: Theory and evidence

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  • Dreher, Axel
  • Gehring, Kai
  • Kotsogiannis, Christos
  • Marchesi, Silvia

Abstract

This paper explores the role of information transmission and misaligned interests across levels of governments in explaining variation in the degree of decentralization across countries. We analyze two alternative policy-decision schemes—‘decentralization’ and ‘centralization’— within a two-sided incomplete information principal-agent framework. The quality of communication depends on the conflict of interests between the government levels and on which government level controls the degree of decentralization. We show that the extent of misaligned interests and the relative importance of local and central government knowledge affect the optimal choice of policydecision schemes. Our empirical analysis confirms that countries’ choices depend on the relative importance of their private information. Importantly, results differ significantly between unitary and federal countries, in line with our theory.

Suggested Citation

  • Dreher, Axel & Gehring, Kai & Kotsogiannis, Christos & Marchesi, Silvia, 2016. "Information transmission within federal fiscal architectures: Theory and evidence," CEPR Discussion Papers 11344, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:11344
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    Cited by:

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    2. Axel Dreher & Sarah Langlotz & Silvia Marchesi, 2017. "Information Transmission And Ownership Consolidation In Aid Programs," Economic Inquiry, Western Economic Association International, vol. 55(4), pages 1671-1688, October.
    3. Choudhury, Atrayee & Sahu, Sohini, 2022. "Revisiting the nexus between fiscal decentralization and government size - The role of ethnic fragmentation," European Journal of Political Economy, Elsevier, vol. 75(C).
    4. Silvia Marchesi & Tania Masi, 2019. "Allocation of Implementing Power: Evidence from World Bank Projects," Development Working Papers 447, Centro Studi Luca d'Agliano, University of Milano.
    5. Choudhury, Atrayee & Sahu, Sohini, 2023. "Reconciling the mixed evidence in the fiscal decentralization-government size nexus using panel quantile regression," Economic Modelling, Elsevier, vol. 125(C).
    6. Mario Jametti & Marcelin Joanis, 2020. "Elections and de facto expenditure decentralization in Canada," Economics of Governance, Springer, vol. 21(3), pages 275-297, September.
    7. Silvia Marchesi & Tania Masi, 2021. "Delegation of implementation in project aid," The Review of International Organizations, Springer, vol. 16(3), pages 655-687, July.

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    More about this item

    Keywords

    Delegation; Centralization; Communication; Fiscal decentralization; State and local government;
    All these keywords.

    JEL classification:

    • H7 - Public Economics - - State and Local Government; Intergovernmental Relations
    • H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models

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