As part of a process of democratization, many countries spanning Europe,
Latin Amertica, Africa, and Asia are reorganizing their governments by
devolving fiscal responsibility and authority to newly empowered regional
and local governments. Although decentralization in each country proceeds
differently, a common element tends to be an initially heavy reliance
on central government grants to fund regional spending. We develop a
theoretical model of regional borrowing decisions in which the incentives
for ...
As part of a process of democratization, many countries spanning Europe,
Latin Amertica, Africa, and Asia are reorganizing their governments by
devolving fiscal responsibility and authority to newly empowered regional
and local governments. Although decentralization in each country proceeds
differently, a common element tends to be an initially heavy reliance
on central government grants to fund regional spending. We develop a
theoretical model of regional borrowing decisions in which the incentives
for regional borrowing depend crucially on how the regions expect the
federal system of finance to evolve. We examine the implications of the
model using data on Spanish regions for the period 1984-1995 and find
evidence that regions may be borrowing inefficiently in response to
incentives imbedded in the Spanish system of fiscal decentralization.
+