Scandinavian Working Papers in Economics
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CTS - Centre for Transport Studies Stockholm (KTH and VTI)
CTS - Centre for Transport Studies Stockholm (KTH and VTI) CTS - Centre for Transport Studies Stockholm (KTH and VTI)
Working papers in Transport Economics

No 2016:12:
Districts’ co-financing of the central government

Johanna Jussila Hammes () and Svante Mandell ()

Abstract: We study two districts’ voluntary co-financing of a centrally provided public good. Income taxes are collected both by the two local governments and by the central government. We compare outcomes with a surplus-maximizing level of public good provision. We show that co-financing per se does not influence the amount of public good provided. Co-financing and lobbying are substitutes, so that increased co-financing lowers the marginal amount of lobbying by a district. The production of the public good is closer to the surplus-maximizing level with co-financing and lobbying than with only lobbying. Including spillovers into the model, the provision of the public good can fall below the surplus-maximizing level if co-financing exceeds some threshold value. In order to understand the Swedish government’s claim that co-financing increases funds available for public good provision, we must assume that the central government’s ability to tax its citizens is limited. In this case, co-financing can raise the amount of the public good provided compared with pure central government provision.

Keywords: Budget constraint; Co-financing; Fiscal federalism; Lobbying; Political economy; Rent-seeking; Spillovers; (follow links to similar papers)

JEL-Codes: H20; H40; H70; (follow links to similar papers)

30 pages, April 15, 2016

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