OECD Economics Department Working Papers

Working papers from the Economics Department of the OECD that cover the full range of the Department’s work including the economic situation, policy analysis and projections; fiscal policy, public expenditure and taxation; and structural issues including ageing, growth and productivity, migration, environment, human capital, housing, trade and investment, labour markets, regulatory reform, competition, health, and other issues.

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Central Control of Regional Budget

Theory with Applications to Russia

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 ...


Keywords: intergovernmental relations, Russian economy, fiscal decentralisation
JEL: H39: Public Economics / Fiscal Policies and Behavior of Economic Agents / Fiscal Policies and Behavior of Economic Agents: Other; H77: Public Economics / State and Local Government; Intergovernmental Relations / Intergovernmental Relations; Federalism; Secession; H11: Public Economics / Structure and Scope of Government / Structure, Scope, and Performance of Government; D83: Microeconomics / Information, Knowledge, and Uncertainty / Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
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