Skip to main content
SpringerLink
Log in

Theory of fiscal federalism: an analysis

  • Research Paper
  • Published:
Journal of Social and Economic Development Aims and scope Submit manuscript

Abstract

The recent scholarship has made distinction between two generations of literature in fiscal federalism. The study has critically analysed the first generation theory and second generation theory of fiscal federalism. Though the latter approaches the problem of fiscal federalism from different perspectives, it does not challenge but complements the former. The paper argues that the second generation theory is an ongoing effort to build a theory in response to fiscal challenges facing a number of countries. In brief, it is aimed at explaining present-day institutional arrangements which can no longer be adequately explained by employing the first generation theory.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Similar content being viewed by others

Notes

  1. Musgrave (1959: 132–133; 179–183) offers the classic assignment of powers and responsibilities in a federal structure from the perspective of what level of government is best suited to handle the various task of government. He considers government as benevolent. See also Musgrave and Musgrave (1984: 513–539).

  2. It was Tiebout (1956: 416) who first developed the decentralisation theorem, which is also known as ‘Tiebout Hypothesis’. According to Tiebout, “his model yields a solution for local goods which reflects the preferences of the population more adequately than they can be reflected at national level.” Later on, ‘Tiebout Hypothesis’ was further developed by Oates (1972).

  3. Bird and Smart (2002: 899) note: “When evaluating the structure of transfer programmes, however, it is essential to pay close attention to the incentives they create for central and local governments and, indirectly, for residents of the different regions of the country. Whether the results of transfers are good or ill depends upon the incentives—whether intended or not that are built into transfer systems”. Goodspeed (2002: 409) maintains: “The recent move towards decentralization in countries such as Spain, Hungary, and South Africa and the difficulties that central governments have had in dealing with fiscal irresponsibility on the part of regional governments in countries such as Argentina, Brazil, and India has made the study of transfer systems one of the most important areas of research in federalism today”.

  4. Among the political scientists, who have contributed a great deal to the recent literature in fiscal federalism or what is known as second generation literature, are Barry Weingast, Jonathan Rodden and Erik Wibbels, among others. Works by Weingast and his collaborators have emphasised the incentive effects of federalism: how inter-governmental fiscal relations affect the behavior of different levels of government. Rodden and others have examined how large vertical imbalances create fiscal problems. They focus on the problems of ‘soft budget constraints’, sub-national borrowing and ‘bail-outs’. Wibbels has studied the relation between political federalism and fiscal federalism.

References

  • Ahmad E, Craig J (1997) Intergovernmental Transfers. In: Ter-Minassian T (ed) Fiscal federalism in theory and practice. The World Bank, Washington, DC, pp 73–107

    Google Scholar 

  • Besley, Coate (2003) Centralized versus decentralized provision of local public goods: a political economy approach. J Public Econ 87:2611–2637

    Article  Google Scholar 

  • Bird RM, Smart M (2002) Intergovernmental fiscal transfers: international lessons for developing countries. World Dev 30(6):899–912

    Article  Google Scholar 

  • Boadway RW, Hobson PAR (1998) Equalization: its contribution to Canada’s economic fiscal progress. John Deutsch Institute for the Study of Economic Policy, Queen’s University, Kingston

  • Brennan G, Buchanan J (1980) Power to tax: analytical foundation of a fiscal constitution. Cambridge University Press, New York

    Google Scholar 

  • Breton A (1996) Competitive governments: an economic theory of politics and public finance. Cambridge University Press, Cambridge

    Google Scholar 

  • Breton A (2000) Federalism and decentralisation. Publius J Fed 30(2):1–46

    Article  Google Scholar 

  • Breton A (2006) Modeling vertical competition. In: Ahmad E, Brosio G (eds) Handbook of fiscal federalism. Edward Elgar, Cheltenham UK, pp 86–105

  • Brøchner J, Jensen J, Svensson P, Sørensen PB (2007) The dilemmas of tax coordination in the enlarged European union. CESifo Economic Studies 53(4):561–595

    Article  Google Scholar 

  • Brosio G (2006) The assignment of revenue from natural resources. In: Ahmad Ehtisham, Brosio Giorgio (eds) Handbook of fiscal federalism. Edward Elgar, Cheltenham, pp 33–60

    Google Scholar 

  • Buchanan JM (1995) Federalism as an ideal political order and an objective for constitutional reform. Publius J Fed 25(2):19–27

    Google Scholar 

  • Buettner T, Wildasin DE (2007) Symposium on new directions in fiscal federalism: an introduction. CESifo Econ Studies 53(4):491–494

    Article  Google Scholar 

  • Datt D, Noronha L, Srivastava N, Sridharan PV (2009) The resource federalism in india: the case of minerals. Econ Political Weekly XXLIV 8:51–59

    Google Scholar 

  • Ferreira SG, Varsano R, Afonso JR (2005) Inter-jurisdictional fiscal competition: a review of the literature and policy recommendations. Braz J Polit Econ 25(3):295–313

    Google Scholar 

  • Fredriksson PG, Muthukumara M, Wollscheid J (2006) Environmental federalism: a panacea or Pandora’s box for developing countries? World Bank Policy Research Working Paper No. 3847, Washington, DC

  • Gamkhar S, Pickerill JM (2012) The state of American federalism 2011–2012: a fend for yourself and activist form of bottom-up federalism. Publius J Fed 42(3):357–386

  • Goodspeed TJ (2002) Bailouts in a federation. Int Tax Public Financ 9:409–421

    Article  Google Scholar 

  • Goulder LH, Stavins RN (2011) Challenges from state-federal interactions in US climate change policy. Am Econ Rev 101(3):253–257

    Article  Google Scholar 

  • Graham ER, Shipan CR, Volden Craig (2013) The diffusion of policy diffusion research in political science. Br J Polit Sci 43:673–701

    Article  Google Scholar 

  • Inman RP (2007) Federalism’s values and the value of federalism. CESifo Econ Studies 53(4):522–560

    Article  Google Scholar 

  • Inman RP, Rubinfeld DL (1997) Rethinking federalism. J Econ Perspect 11(4):43–64

    Article  Google Scholar 

  • Jenkins R (2003) India’s states and the making of foreign economic policy: the limits of the constituent diplomacy paradigm. Publius J Fed 33(4):63–81

    Article  Google Scholar 

  • Jha PC (2014) Federalism, regionalism and states paradiplomacy in India. In: Lobo L, Sahu M, Shah J (eds) Federalism in India: towards a fresh balance of power. Rawat Publication, Jaipur, pp 234–260

  • Jin H, Qian Y, Weingast BR (2005) Regional decentralization and fiscal incentives: federalism, Chinese style. J Public Econ 89:1719–1742

    Article  Google Scholar 

  • Levaggi R (2002) Decentralized budgeting procedures for public expenditure. Public Financ Rev 30:273–295

    Article  Google Scholar 

  • Lockwood B (2006) The Political economy of decentralization. In: Ahmad E, Brosio G (eds) Handbook of fiscal federalism. Edward Elgar, Cheltenham, pp 33–60

    Google Scholar 

  • McCann PJC, Shipany CR, Volden C (2015) Top-down federalism: state policy responses to national government discussions. Publius J Fed, pp 1–31. http://publius.oxfordjournals.org/content/early/2015/04/01/publius.pjv013.full.pdf+html

  • McKinnon RI (1997) The logic of market-preserving federalism. Va Law Rev 83(7):1573–1580

    Article  Google Scholar 

  • Michelmann H (2009) Foreign relations in federal countries. McGill-Queen’s University Press, Kingston and Montreal

  • Millimet DL (2013) Environmental federalism: a survey of the empirical literature, IZA Discussion Paper No. 7831. http://ftp.iza.org/dp7831.pdf

  • Mookherjee D (2014) Political decentralization. http://people.bu.edu/dilipm/wkpap/PolDecentArtsubm.pdf. Accessed 2 July 2015

  • Musgrave R (1959) Theory of public finance: a study in public economy. McGraw-Hill, New York

    Google Scholar 

  • Musgrave RA, Musgrave PB (1984) Public finance in theory and practice. McGraw-Hill, San Francisco

    Google Scholar 

  • Oates WE (1972) Fiscal federalism. Harcourt Brace Jovanovich Inc, New York

    Google Scholar 

  • Oates WE (1999) An essay on fiscal federalism. J Econ Lit 37(3):1120–1149

    Article  Google Scholar 

  • Oates WE (2001) A reconsideration of environmental federalism, discussion paper 01–54, resources for the future, Washington, D.C. Resources for the Future Discussion Paper 01–54. http://www.rff.org/documents/rff-dp-01-54.pdf

  • Oates WE (2005) Towards a second generation theory of fiscal federalism. Int Tax Public Financ 12(4):349–373

    Article  Google Scholar 

  • Oates WE (2008) On The evolution of fiscal federalism: theory and institutions. Natl Tax J LXI 2:313–334

    Article  Google Scholar 

  • Prud’homme R (1995) The danger of decentralization. World Bank Res Obs 10(2):201–220

  • Qian Y, Weingast BR (1997) Federalism as commitment to preserving market incentives. J Econ Perspect 11(4):83–92

    Article  Google Scholar 

  • Rao GM, Singh N (2005) Political economy of federalism in India. Oxford University Press, New Delhi

    Google Scholar 

  • Rao MG, Raghunandan TR, Gupta M, Datta P, RJ Pratap, Amarnath HK (2011) Fiscal decentralization to rural local governments in India: selected issues and reform options. National Institute of Public Finance and Policy, New Delhi

  • Rodden J (2002) The dilemma of fiscal federalism: grants and fiscal performance around the world. Am J Polit Sci 46(3):670–687

    Article  Google Scholar 

  • Rodden J (2008) Federalism. In: Wittman DA, Weingast BR (eds) The oxford handbook of political economy. Oxford University Press, New York, pp 357–370

    Google Scholar 

  • Rodden J, Rose-Ackerman S (1997) Does federalism preserve market? Va Law Rev 83(7):1521–1572

    Article  Google Scholar 

  • Rodden J, Eskeland GS, Litvack J (2003) Introduction and overview. In: Rodden J, Eskeland GS, Litvack J (eds) Fiscal decentralization and challenges of hard budget constraints. Massachusetts Institute of Technology, Cambridge, pp 1–31

    Google Scholar 

  • Rubinfeld DL (1997) On federalism and economic development. Va Law Rev 83(7):1581–1592

    Article  Google Scholar 

  • Salmon P (2006) Horizontal Competition among Government. In: Ahmad E, Brosio G (eds) Handbook of fiscal federalism. Edward Elgar, Cheltenham, pp 33–60

  • Schnyder S (2011) Laboratory federalism: policy diffusion and yardstick competition. Available at http://is.muni.cz/do/econ/soubory/katedry/kve/6403220/25140474/labo1.pdf

  • Seabright P (1996) Accountability and decentralisation in government: an incomplete contracts model. Eur Econ Rev 40:61–89

    Article  Google Scholar 

  • Shah A (1991 New fiscal federalism in Brazil. discussion paper no. 124. World Bank, Washington, DC

  • Shipan CR, Volden C (2006) Bottom-up federalism: the diffusion of antismoking policies from U.S. cities to states. Am J Polit Sci 50(4):825–843

    Article  Google Scholar 

  • Soren Jason (2010) The institutions of fiscal federalism. Publius J Fed 41(2):207–231

    Article  Google Scholar 

  • Sugiyama NB (2011) Bottom-up policy diffusion: national emulation of a conditional cash transfers program in Brazil. Publius J Fed 42(1):25–51

  • Ter-Minassian T (ed) (1997) Fiscal federalism in theory and practice Washington. International Monetary Fund, D.C.

    Google Scholar 

  • Tiebout CM (1956) A pure theory of local expenditure. J Polit Econ 64(5):416–424

    Article  Google Scholar 

  • Tommasi M, Weinschelbaum F (2007) Centralization vs. decentralization: a principal agent analysis. J Public Econ Theory 9(2):369–389

  • Weingast BR (1995) The economic role of political institutions: market-preserving federalism and economic development. J Law Econ Organ 11(1):1–31

    Google Scholar 

  • Weingast BR (2005) The performance and stability of federalism: an institutional perspectives. In: Menard C, Shirley M (eds) Handbook of the new institutional economics. Springer, Berlin, Heidelberg, pp 149–172

    Chapter  Google Scholar 

  • Weingast BR (2013) Second generation fiscal federalism: political aspects of decentralized and economic development. World Dev VXX:1–12

  • Wibbels E (2000) Federalism and the politics of macroeconomic policy and performance. Am J Polit Sci 44(4):687–702

    Article  Google Scholar 

  • Wibbels E (2003) Bailouts, Budget constraints and leviathan: comparative federalism and lessons from the early United States. Comp Polit Studies 36(5):475–508

    Article  Google Scholar 

  • Wildasin DE (1998) Fiscal aspect of evolving federations: issues for policy and research, policy research working paper, No. 1885. The World Bank, Washington, D.C

Download references

Author information

Authors and Affiliations

  1. Amity Law School, Amity University Rajasthan, Jaipur, India

    Prakash Chandra Jha

Authors
  1. Prakash Chandra Jha
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Prakash Chandra Jha.

Rights and permissions

Reprints and permissions

About this article

Check for updates. Verify currency and authenticity via CrossMark

Cite this article

Chandra Jha, P. Theory of fiscal federalism: an analysis. J. Soc. Econ. Dev. 17, 241–259 (2015). https://doi.org/10.1007/s40847-015-0009-0

Download citation

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s40847-015-0009-0

Keywords

Search

Navigation