Central control of regional budgets: theory with applications to Russia
Опубликовано на портале: 19-11-2003
OECD Economics Department Working Papers. 2001. No. 275.Организация: ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT (OECD)
Motivated by the recent experience in the Russian Federation, this paper examines the implications of imposing central control on the budgetary activities of a subnational government. In a highly stylised multi-task principal-agent model (Holmstrom and Milgrom (1991)), a central government cannot directly monitor the informal budgetary operations of a regional administration, but seeks to improve fiscal policies by exerting control over a "formal" regional budget and imposing (limited) costs on informal behaviour. In the static case of the model, the control of subnational budgetary operations by a benevolent central government may increase social welfare, but at the expense of higher (implicit and explicit) taxation of economic organisations in the region, lower output, and a strong orientation of informal policies toward rent seeking activities. The additional imposition of costs on regions for conducting informal budgetary operations has multiple (indeterminate) effects in general, but the imposition of small fixed costs has an unambiguously negative effect, leading to still higher informal taxation with no social benefit. Corruption, involving the payment of fixed bribes, is one interpretation of this case. Allowing for the possibility that the region may underfulfil the formal budget and divert resources "underground" creates still further problems, particularly in the Russian case of revenue sharing between budgets. Two other considerations also weaken the case for central control: a) a dependence of investment on future expected taxes in a context when long-term commitment to tax rates is politically difficult, b) a recognition that the central government is part "Leviathan," with an agenda that does not completely coincide with the pursuit of social welfare. The results are generally consistent with what appears to be the situation in most Russian regions: central control of subnational taxes, high (unfunded) federal expenditure mandates, the widespread use of numerous costly informal policy instruments, and a high (formal and informal) tax burden on business and investment.
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