Thushyanthan Baskaran

Fiscal Decentralization and Economic Growth in OECD Countries: Is There a Relationship?

We study the effect of fiscal decentralization on economic growth for twenty-three Organisation for Economic Co-operation and Development countries from 1975 to 2008. In order to proxy fiscal decentralization, we use both traditional Government Finance Statistics (GFS)–style measures and new measures that account for the degree of subnational tax autonomy. The regressions with GFS–style measures indicate that fiscal decentralization has a negative but statistically insignificant effect on growth. Regressions with the new measures also result in negative coefficient estimates. However, they are larger in absolute terms and statistically significant. For the empirical literature on fiscal federalism, these results imply that measures of fiscal decentralization that account for subnational tax autonomy should be preferred to traditional GFS-style measures. From a policy perspective, we conclude that policy makers should be aware of the economic trade-offs when pursuing reforms toward more fiscal decentralization.

Fiscal Federalism, Decentralization, and Economic Growth: A Meta‐Analysis

The theoretical literature on fiscal federalism has identified several channels through which government decentralization could affect economic growth. Much of the literature focuses on the efficiency aspects of a decentralized provision of public services, but decentralization may also increase growth by raising the ability of the political system to innovate and carry out reforms. In contrast, some authors argue that decentralization increases corruption and government inefficiency, and thus may diminish growth. Given this theoretical ambiguity, several studies have attempted to identify the effect of decentralization on economic growth empirically over the last two decades. We review and conduct a meta-analysis of this empirical literature. Based on our analysis, we point out open questions and discuss possible ways to answer them.

Direct democracy and local public finances under cooperative federalism

This paper exploits the introduction of the right of referenda at the local level in the German state of Bavaria in 1995 to study the fiscal effects of direct democracy. In the first part of the paper, we establish the relationship between referenda activity and fiscal performance by using a new dataset containing information on all 2500 voter initiatives between 1995 to 2011. This selection on observables approach, however, suffers from obvious endogeneity problems in this application. The main part of the paper exploits population dependent discontinuities in the signature and quorum requirements of referenda to implement a regression discontinuity design (RDD). To safeguard against co-treatments that might affect fiscal outcomes simultaneously at the same thresholds, we validate our results by extending the RDD approach to a difference-in-discontinuity (DiD) design. By studying direct legislation in an archetypical cooperative federation as Germany, our paper extends the literature to a novel institutional setting. The results indicate that in our setting – and in contrast to most of the evidence from Switzerland and the US – direct democracy causes an expansion of local government budgets.

Do Municipal Mergers Reduce Costs? Evidence from a German Federal State

We study the fiscal consequences of municipal mergers by making use of a largescale merger reform in the German federal state of Brandenburg. This reform, which was implemented from 2001 to 2003, led to a substantial reduction in the number of municipalities. Individual mergers were heterogeneous across a number of dimensions, which allows us to contribute to the literature by exploring the consequences of different types of mergers within the same institutional setting. Focusing in particular on the distinction between compulsory and (semi-) voluntary mergers, we implement a difference-in-difference design with panel data from 1995-2010 at the level of post-merger municipalities. We find significant reductions in (administrative) expenditures after compulsory mergers. Voluntary mergers, on the other hand, have no effect on expenditures. We also show that the effects of voluntary and compulsory mergers vary according to further (secondary) characteristics of a merger.

Did the Maastricht Treaty Matter for Macroeconomic Performance? A Difference-in-Difference Investigation

We explore the impact of the Maastricht treaty on fiscal and macroeconomic outcomes in the EU with the difference-in-difference methodology. Our dataset covers 23 OECD countries over the 1975-2006 period. EU 15 countries are classified as the treatment and eight non-EU OECD countries as the control group. The results indicate that the provisions in the Maastricht treaty have been either irrelevant or even harmful for fiscal and macroeconomic developments in the EU. Evidence for a detrimental impact of the Maastricht criteria is particularly strong for the period after the start of the third stage of EMU

Electoral Competition and Endogenous Political Institutions: Quasi-Experimental Evidence from Germany

Do established parties change political institutions to disadvantage new political actors if the latters’ electoral prospects improve? We study this question with a natural experiment from the German federal state of Hesse. The experiment is an electoral reform for local elections that improved the electoral prospects of smaller parties and party rebels. However, local politicians from the large mainstream parties could adjust municipal political institutions in such a way as to counteract this effect of the reform. One such institutional adjustment was to reduce the size of the local council because a reduction in council size raises the implicit electoral threshold and thus disadvantages especially smaller parties. Using a dataset that covers all 426 Hessian municipalities over the period 1989–2011, we document with a difference-in-discontinuities design that municipalities where the electoral competitiveness of smaller parties improved more after the reform saw a larger reduction in their council size. Hence, established parties appear to erect barriers to entry by adjusting political institutions once new political actors become viable electoral alternatives.

The Effect of Direct Democracy on the Level and Structure of Local Taxes

We study the effect of direct democracy on local taxation. Our setting is the German federal state of Bavaria, where in 1995 a state-wide referendum introduced the possibility to initiate direct democratic legislation into the local government code. Relying on a sample of all Bavarian municipalities over the period 1980-2011, we hypothesize that complementing a representative form of government with direct democratic elements leads to (i) higher local tax rates and (ii) a shift of the local tax mix from taxes with broader (property taxes) to taxes with narrower bases (business taxes). For identification, we implement selection on observables and difference-in-discontinuity designs. Our results show that both actual direct democratic activity measured by the number of initiatives and the ease with which direct democratic legislation can be implemented measured by signature and quorum requirements increase local tax rates and shift the tax mix toward taxes with narrower bases.

Direct Democracy and Local Public Finances under Cooperative Federalism: Direct democracy and local public finances under cooperative federalism

This paper exploits the introduction of the right of referenda at the local level in the German state of Bavaria in 1995 to study the fiscal effects of direct democracy. In the first part of the paper, we establish the relationship between referenda activity and fiscal performance by using a new dataset containing information on all 2500 voter initiatives between 1995 to 2011. This selection on observables approach, however, suffers from obvious endogeneity problems in this application. The main part of the paper exploits population dependent discontinuities in the signature and quorum requirements of referenda to implement a regression discontinuity design (RDD). To safeguard against co-treatments that might affect fiscal outcomes simultaneously at the same thresholds, we validate our results by extending the RDD approach to a difference-in-discontinuity (DiD) design. By studying direct legislation in an archetypical cooperative federation as Germany, our paper extends the literature to a novel institutional setting. The results indicate that in our setting - and in contrast to most of the evidence from Switzerland and the US - direct democracy causes an expansion of local government budgets.

Revenue Decentralization, Central Oversight and the Political Budget Cycle: Evidence from Israel

This paper examines whether revenue decentralization and direct external financial supervision affect the incidence and strength of political budget cycles, using a panel of Israeli municipalities during the period 1999–2009. We find that high dependence on central government transfers – as reflected in a low share of locally raised revenues in the municipalitys budget – exacerbates political budget cycles, while tight monitoring – exercised through central government appointment of external accountants to debt accumulating municipalities – eliminates them. We also find that this pattern is predominantly accounted for by development expenditures. These results suggest that political budget cycles can result from fiscal institutions that create soft budget constraints: that is, where incumbents and rational voters can expect that the costs of pre-election expansions will be partly covered later by the central government.

Tax Innovations and Public Revenues in Sub-Saharan Africa

Abstract We study the effect of two tax innovations – value added taxes (VAT) and autonomous revenue authorities (ARA) – on tax revenues in sub-Saharan Africa. The dataset consists of 47 countries over 1980–2010. We find that VATs have no effect on total tax revenues, neither in the short- nor in the long-run. ARAs lead to higher tax revenues in the short- and medium-run, but the effect dissipates over time. The main conclusion is that tax innovations are not a panacea to overcome the revenue shortages in African countries, but they are helpful in the short- and medium-run.