Hamilton's Paradox: The Promise and Peril of Fiscal Federalism (Cambridge Studies in Comparative Politics)

As new federations take shape and old ones are revived around the world, a difficult challenge is to create incentives for fiscal discipline. A key question is whether a politically-motivated central government can credibly commit not to bail out subnational governments in times of crisis if it funds most of their expenditures. The center can commit when subnational governments retain significant tax autonomy, as in the United States. Or if the center dominates taxation, it can tightly regulate borrowing, as in many unitary systems. In a third group of countries including Brazil and Germany, the center can neither commit to a system of market-based discipline nor gain a monopoly over borrowing. By combining theory, quantitative analysis, and historical and contemporary case studies, this book explains why different countries have had dramatically different experiences with subnational fiscal discipline. Half-title......Page 3 Series-title......Page 5 Title......Page 7 Copyright......Page 8 Dedication......Page 9 Contents......Page 11 Preface......Page 13 Acknowledgments......Page 17 1 Introduction and Overview......Page 19 I. Promise and Peril......Page 22 II. Federalism and Sovereignty......Page 24 III. Fiscal Institutions......Page 26 IV. Political Institutions......Page 28 V. Case Studies......Page 29 VI. Endogenous Institutions......Page 30 VII. Policy Implications......Page 32 2 Promise and Peril: Intellectual History......Page 33 I. A Brief Intellectual History of Federalism in Economics and Political Science......Page 34 II. The Promise of Fiscal Discipline......Page 38 III. A Closer Look at Definitions and Data......Page 41 Decentralization......Page 43 Federalism......Page 49 IV. Sorting Out the Promise and Peril: The Political Economy Approach......Page 58 3 Sovereignty and Commitment......Page 66 I. The Bailout Game......Page 68 II. The United States in the Nineteenth Century......Page 73 The Bailout Game in Action......Page 75 Externalities and the Structure of Jurisdictions......Page 85 III. Looking Ahead......Page 89 Appendix 3.1......Page 90 4 The Power of the Purse: Intergovernmental Grants and Fiscal Discipline......Page 93 I. Intergovernmental Finance and Commitment......Page 94 II. Credit Ratings and Bailout Expectations......Page 98 Borrowing Restrictions......Page 112 Summary of Hypotheses......Page 116 Main Variables......Page 117 Control Variables......Page 119 V. Cross-Section Analysis......Page 121 VI. Time Series Cross-Section Analysis......Page 127 VII. Total Public Sector Deficits......Page 131 VIII. Summary of Results......Page 134 IX. Looking Ahead......Page 135 5 Disease or Cure?: Political Parties and Fiscal Discipline......Page 137 I. Bailouts and Political Incentives......Page 139 Zero-Sum Bailouts......Page 140 Negative-Sum Bailouts......Page 141 II. Parties and Legislatures......Page 142 III. Electoral Externalities......Page 143 IV. Empirical Analysis......Page 146 V. A Closer Look at Measurement......Page 150 VI. Conclusion......Page 155 6 An Approach to Comparative Case Studies......Page 158 I. Subnational Sovereignty and Fiscal Discipline......Page 159 II. The Political Economy of Semisovereignty: The Logic of the Case Studies......Page 165 7 Fiscal Federalism and Bailouts in Postwar Germany......Page 171 Fiscal Federalism......Page 175 Political Federalism......Page 180 II. The Bailout Game in Action: Bremen and Saarland......Page 181 III. Explaining Differences across the Landerh......Page 184 Control Variables......Page 189 Electoral Competitiveness......Page 193 Empirical Approach......Page 194 V. Conclusion......Page 203 8 The Crisis of Fiscal Federalism in Brazil......Page 206 Fiscal Federalism......Page 208 Political Federalism......Page 219 II. State-Level Fiscal Crises and Bailouts......Page 222 Background......Page 223 The Most Recent Crisis......Page 224 Intergovermental Debt Negotiations......Page 227 Who Benefited from Bailouts?......Page 230 III. Explaining Variation across States......Page 232 IV. Conclusions: Germany and Brazil......Page 240 9 The Challenge of Reform in Federations......Page 244 I. Breaking out of the Joint-Decision Trap: The Role of Electoral Externalities......Page 247 II. Case Studies......Page 250 Canada......Page 251 Australia......Page 256 Germany......Page 258 Brazil......Page 262 III. Conclusion......Page 266 10 The Origins of Subnational Sovereignty......Page 268 Germany......Page 270 Brazil......Page 273 Lessons......Page 276 II. Toward a Comparative Theory of Dual Fiscal Sovereignty......Page 279 Political Parties Revisited......Page 280 Inequality and Economic Geography......Page 283 III. Conclusion......Page 285 I. Hamilton’s Paradox Revisited......Page 287 II. Key Arguments and Findings......Page 288 III. Policy Implications......Page 293 IV. Directions for Future Research......Page 298 References......Page 301 index......Page 319

As new federations take shape and old ones are revived around the world, a difficult challenge is to create incentives for fiscal discipline. A key question is whether a politically-motivated central government can credibly commit not to bail out subnational governments in times of crisis if it funds most of their expenditures. By combining theory, quantitative analysis, and historical and contemporary case studies, this book provides a new perspective on why different countries have had dramatically different experiences with subnational fiscal discipline.

As new federations take shape and old ones are revived around the world, a difficult challenge is to create incentives for fiscal discipline. By combining theory, quantitative analysis, and contemporary case studies, this book lays out the first systematic explanation of why decentralized countries have had dramatically different fiscal experiences

This book explains why different countries have had dramatically different experiences with subnational fiscal discipline.