Content area
Full Text
c[circlecopyrt]International Tax and Public Finance, 12, 349373, 2005
2005 Springer Science + Business Media, Inc. Printed in the Netherlands.WALLACE E. OATES [email protected]
Department of Economics, University of Maryland, College Park, MD 20782, USAAbstractDrawing on a wide range of literature and ideas, a new second-generation theory of fiscal federalism is emerging
that provides new insights into the structure and working of federal systems. After a restatement and review of the
first-generation theory, this paper surveys this new body of work and offers some thoughts on the ways in which
it is extending our understanding of fiscal federalism and on its implications for the design of fiscal institutions.Keywords: fiscal federalism, fiscal competition, regional and local governmentsJEL Code: H77, H11Contrasting forces, some leading to increased fiscal centralization and some to greater
decentralization, are producing an ongoing restructuring of public sectors throughout the
world. In many industrialized and developing countries, major programs have been introduced to shift decision-making from the center to provincial and local governments. In
the developing nations, such restructuring has been, in part, a response to the failure of
centralized planning to bring the sustained growth that was one of its major objectives.
Likewise in the industrialized world, the appeal of fashioning policies in response to more
localized preferences and circumstances has led to the establishment of Welsh and Scottish
Assemblies in the U.K., a shift of powers to regional governments in Spain, and many
other cases of decentralization of the public sector. At the same time, we are witnessing a
process of centralization in Europe: the creation and evolution of a new top level of government, the European Union, in the context of European monetary integration. Just what
the ultimate range of authority and responsibilities of the new central level of government
will be is as yet unclear. But these contrasting forces in Europe raise the intriguing question of the future of the national governments of the member states (Inman and Rubinfeld,
1992).In the context of the evolution of the public sector, scholars have likewise been active in
extending and enriching our understanding at a conceptual level of the structure and working
of multi-level governmentso-called fiscal federalism in the economics literature. Their
efforts are aimed at producing what Qian and Weingast (1997) and others call...