5 4 ARDYANTO young economist UGM
The Impact of Decentralizing
Public Good Provisions on Social Welfare
Hotel Grand Hyatt, Nusa Dua - Bali
10-11 December 2015
Presented by:
Ardyanto Fitrady
Universitas Gadjah Mada
Motivations
The existences of spillover across jurisdictions generate
inefficiency and induces non-optimal public policy, such as
public good provision and taxation.
Investigating the relationship between degree of spillover and
potential gains from decentralization.
Ardyanto Fitrady
The Impact of Decentralizing Public Good Provisions on Social W
Research Questions
1
How can we model the impact of fiscal decentralization on
social welfare when the spillovers exist in the context of an
urban economy?
2
Does fiscal decentralization benefit cities and society when
some degree of spillover is present?
3
Are the results for developed countries consistent with the
results for developing countries?
Ardyanto Fitrady
The Impact of Decentralizing Public Good Provisions on Social W
Literature reviews
Samuelson (1954) provided conditions for allocative efficiency
for public good provision. In general, we have no reason to
believe that public goods will be provided efficiently.
Tiebout (1956) conjectured that competition among publicly
elected governments for mobile households may yield an
efficient provision of local public goods.
Barr and Davis (1966) provided some of the foundations for a
political theory of local expenditures.
Oates (1972) showed that fiscal federalism is pareto optimum
and efficient if there are no spillovers among jurisdictions.
Definition
Ardyanto Fitrady
The Impact of Decentralizing Public Good Provisions on Social W
Literature reviews
Bewley (1981) shows theoretically that Tiebout equilibrium is
not pareto optimum or T.E. will only achieve social optimum
in a very specific and restricted assumptions.
Besley and Coate (2003) provides a theoretical framework for
centralized vs. decentralized provision of local public good
from a political economy approach.
Calabrese, Epple, Romano (2012) demonstrates that
decentralization is less efficient than centralization using
theoretical model and calibrations.
Ardyanto Fitrady
The Impact of Decentralizing Public Good Provisions on Social W
Contributions
Gaps in literature:
In urban economy context, there are extensive work on externality/spillover and on decentralization as separate topics. However,
to the best of my knowledge, there is no literature that discuss the
impact of various levels of spillover and fiscal decentralization on
welfare in the context of urban economy.
Ardyanto Fitrady
The Impact of Decentralizing Public Good Provisions on Social W
Model
Setting:
There are four agents in the model: households, housing
owners, local governments and a central government.
MA is divided into J jurisdictions
MA which consists of J jurisdictions, each of them has fixed
boundaries
Each jurisdiction has a local housing market, provides (fully
congested) public good, g , and charges property taxes, t
local PG provision and the property tax rate are determined
by majority rule in each jurisdiction
Households are renters and housing is owned by absentee
landlords
There is a continuum of households (y , α)
Households behave as price takers and have preferences
defined over a local public good, and housing services, h.
There are spillovers (positive externalities) of local public
goods across jurisdictions.
Ardyanto Fitrady
The Impact of Decentralizing Public Good Provisions on Social W
Keys
The impact of spillover
Spillover = [0, 1]
Ui = U(xi , hi , gi , κg−i ; α)
Ui = [βx x ρ + βh hρ + βgi (α)giρ + βgj (α)κgjρ ]1/ρ
Ardyanto Fitrady
The Impact of Decentralizing Public Good Provisions on Social W
Decentralized Policy
Agents:
Households
Homeowners
Governments
Stages:
Stage 1 HHs choose a jurisdiction and rent a house in a
jurisdiction
Stage 2 they vote in the corresponding jurisdiction for property tax
that used to finance the local PG
Stage 3 local PG is determined from local gov’t budget balance
Equations
Ardyanto Fitrady
The Impact of Decentralizing Public Good Provisions on Social W
Pareto optimum characterization
S ≡ [α, α]
¯ × [y , y¯] ⊂ R+2
More
max
J hZ
X
r (y ,α),ai (y ,α),R,Ti ,ti ,pi ,gi ,g−i
i=1
ω(y , α)Vie (pi , gi , κg−i , y + r (y , α) − Ti , α)
S
Z
ai (y , α)f (y , α) dy dα + ωR R/J +
pi /(1+ti )
0
Hsi (z) dz
i
(1)
subject to:
Z
R + r (y , α)f (y , α) dy dα = 0
S
Z
i
hd (pi , y + r (y , α) − Ti , gi , κg−i , α)ai (y , α)f (y , α) dy dα
(2)
S
= HSi (pi /(1 + ti ))
Z
ti p i
HSi (pi /(1 + ti ))
Ti
ai (y , α)f (y , α) dy , dα +
1
+ ti
S
Z
ai (y , α)f (y , α) dy dα
= gi
(3)
(4)
S
Ardyanto Fitrady
The Impact of Decentralizing Public Good Provisions on Social W
ai (y , α) ∈ [0, 1] ,
J
X
i=1
κ ∈ [0, 1]
ai (y , α) = 1
∀(y , α)
(5)
(6)
Ardyanto Fitrady
The Impact of Decentralizing Public Good Provisions on Social W
First-order Conditions
∂L
=Ω + ωR = 0
∂R
J
J
X
∂L X
=
ωU1i ai +
ηi (hdi )2 ai + Ω = 0
∂r
i=1
i=1
∂L
∂ai
∂L
∂Ti
∂L
∂ti
∂L
∂gi
∂L
∂g−i
∂L
∂pi
(7)
(8)
=ωVie + ηi hdi − λi (Ti − gi ) = 0
(9)
= − ωU1i − ηi (hdi )2 + λi = 0
(10)
(1 + ti ) i
= − ωR + λi (1 − ti εis ) + ηi
εs = 0
pi
Z
Z
Z
ai f dy dα = 0
= ωU3i ai f dy dα + ηi (hdi )3 ai f dy dα − λi
S
S
(11)
(12)
S
=ωU4i κ + ηi (hdi )4 δ = 0
(13)
Z
Z
1 + ti
+ ωR + λi ti (1 + εis )
= ηi (hdi )1 ai f dy dα − ωU1i hdi ai f dy dα
Hsi
S
S
− ηi
(Hsi )′
=0
Hsi
(14)
Ardyanto Fitrady
The Impact of Decentralizing Public Good Provisions on Social W
Indirect utility function
max [βx x ρ + βh hρ + αgiρ + ακgjρ ]1/ρ
h
hd =
y −r
1
(p ββxh ) 1−ρ
(16)
+p
V˜ (.) = [(y − r )ρ Φ(p) + αgiρ + ακgjρ ]1/ρ
Φ(p) =
βx
1
1 + (p ββxh ) ρ−1
+
(15)
βh (p ββxh )
(17)
ρ
ρ−1
1
[1 + (p ρ ββxh ) ρ−1 ]ρ
(18)
Boundary locus
Ardyanto Fitrady
The Impact of Decentralizing Public Good Provisions on Social W
Parameters
Table: Parameters for Each MA
Parameter
ncom
µlny
σlny
βh
βx
ρ
γ
θ
κ
United States
5
10.5171
0.8862
0.3559
1
-0.01
0.25
3
0 to 1
Ardyanto Fitrady
Indonesia
5
9.8614
0.8310
0.3959
1
-0.01
0.37
1.7
0 to 1
The Impact of Decentralizing Public Good Provisions on Social W
Results: Head Tax
Spillover and welfare in a
head-tax world, MA in US
When the spillover is relatively
low, the benefit from having
positive spillover (from other
jurisdictions) dominates the
cost of having ”non-optimal”
tax rates and public good
provisions.
As the degree of spillover
increases, the potential gain of
decentralization declines.
1650
1600
Potential gain (US$)
1550
1500
1450
1400
1350
1300
1250
0
0.1
0.2
0.3
0.4
0.5
κ
0.6
0.7
0.8
0.9
1
Ardyanto Fitrady
In a different context, this
result substantiates Besley and
Coate (2003) that there is a
critical value of spillover where
centralization dominates
decentralization.
The Impact of Decentralizing Public Good Provisions on Social W
Results: Head Tax
Spillover and welfare in a
head-tax world, MA in Indonesia
As the spillover increases, the
potential lost of
decentralization also increases.
The impact of spillover is more
moderate than in US case
−1200
Potential gain (US$)
−1250
Relatively insignificant impact
on welfare gain when the
spillover level is relatively low
(0 ≤ κ ≤ 0.3)
−1300
−1350
−1400
−1450
0
0.1
0.2
0.3
0.4
0.5
κ
0.6
0.7
0.8
0.9
1
Ardyanto Fitrady
It resonates Oates’
decentralization theorem
(1972).
The Impact of Decentralizing Public Good Provisions on Social W
Results: Property Tax
Spillover and welfare in a
property-tax world, MA in US
As the spillover increases,
the potential lost of
decentralization also
increases.
0
Potential gain (US$)
−100
It resonates Oates’
decentralization theorem
(1972).
−200
−300
−400
−500
−600
0
0.1
0.2
0.3
0.4
κ
0.5
0.6
0.7
0.8
0.9
Ardyanto Fitrady
The Impact of Decentralizing Public Good Provisions on Social W
Results: Property Tax
Spillover and welfare in a
property-tax world, MA in
Indonesia
As the spillover increases, the
potential lost of
decentralization also increases.
Decentralization is more
favorable when there is no
spillover or when spillover is
low
560
550
Potential gain (US$)
540
530
This result substantiates the
idea of Oates’ decentralization
theorem (1972).
520
510
500
490
480
470
0
0.1
0.2
0.3
0.4
0.5
κ
0.6
0.7
0.8
0.9
1
Ardyanto Fitrady
The Impact of Decentralizing Public Good Provisions on Social W
Results: For different income levels
Income level and welfare change
at various degrees of spillover,US
2400
2200
Potential Gain(US$)
2000
1800
1600
1400
1200
1000
800
600
400
10.6
10.5
µln y
10.4
0
0.2
0.4
0.6
0.8
1
κ
Ardyanto Fitrady
When the mean income is
relatively low, a higher spillover
level will decrease the benefit
from decentralization
When the mean income is
relatively high, a higher
spillover level will increase the
benefit from decentralization
There is an indication that an
economy with higher mean
income will gain more benefit
from decentralized tax policy
at various level of spillover
level, ceteris paribus.
The Impact of Decentralizing Public Good Provisions on Social W
Income level and welfare change at various degrees of spillover
2400
2200
µln y=10.6
2000
Potential Gain(US$)
1800
1600
1400
µln y=10.5
1200
1000
800
600
400
0
µln y=10.4
0.2
0.4
κ
0.6
Ardyanto Fitrady
0.8
1
The Impact of Decentralizing Public Good Provisions on Social W
Results: For different inequality
Inequality and welfare change at
various degrees of spillover
When the inequality is high, the
impact of spillover on the benefit
from decentralization become
more inconclusive (depends on
the spillover).
2000
Potential Gain(US$)
As inequality increases, the
potential gain of decentralization
is linearly higher.
1500
1000
500
0.9
1
0.8
0.85
0.6
0.4
σln y
0.8
0.2
0
κ
Urban decentralization tends to
be accompanied by significant
increases in income inequality
(Wheeler, 2006).
Rich countries benefit from
decentralization with regard to a
more equal regional income
distribution but stimulate higher
inequality in developing countries
(Lesmann, 2011).
Ardyanto Fitrady
The Impact of Decentralizing Public Good Provisions on Social W
Income level and welfare change at various degrees of spillover
1800
1600
σln y=0.9
Potential Gain(US$)
1400
1200
1000
800
600
σln y=0.8
400
0
0.2
0.4
κ
0.6
Ardyanto Fitrady
0.8
1
The Impact of Decentralizing Public Good Provisions on Social W
Conclusions
Spillover level does affect the potential gain of
decentralization.
In the case of efficient taxation, the impacts of spillover are
ambiguous:
Relatively low level of spillover has a positive impact on the
potential gain of decentralization.
Relatively high level of spillover has a negative impact on the
potential gain of decentralization in both developed and
developing countries.
In property-tax case, any degree of spillover has negative
impact on the potential gain from decentralization.
Ardyanto Fitrady
The Impact of Decentralizing Public Good Provisions on Social W
In general, the results substantiate Oates’ decentralization
theorem
However, the impact of spillover level on the potential gain of
decentralization varies across different level of income vis-`a-vis
income inequality.
Spillover hurts MA with lower income more than MA with
higher income.
a higher level of inequality amplifies the benefit of
decentralization, which illustrates that developed
countries—that generally have higher income
inequality—potentially gain more benefits from
decentralization.
Ardyanto Fitrady
The Impact of Decentralizing Public Good Provisions on Social W
Policy implications
Policy makers should be aware that decentralization may
generate loss to the society.
The results suggest that some taxes might be better to
remain under centralized policy.
As the consequence of spillover, coordination among
jurisdictions is very important to minimize the cost of spillover
in the metropolitan area. Consolidating the resources and
coordination in choosing the type and level of public good
provision are potentially beneficial to all jurisdictions in the
metropolitan area and will minimize the cost of spillover and
potential costs of duplication.
Ardyanto Fitrady
The Impact of Decentralizing Public Good Provisions on Social W
APPENDIX
Ardyanto Fitrady
The Impact of Decentralizing Public Good Provisions on Social W
Fiscal Decentralization
Fiscal federalism is a general normative framework for
assignment of functions to the different levels of government
and appropriate fiscal instruments for carrying out these
functions (Oates, 1999)
Fiscal decentralization is the devolution by the central
government to local governments (states, regions,
municipalities) of specific functions with the administrative
authority and fiscal revenue to perform those functions (Kee,
2003)
Back
Ardyanto Fitrady
The Impact of Decentralizing Public Good Provisions on Social W
Standardized value of joint distribution
To calculate community populations and incomes, we use the result from Epple (1999) to get the standardized value of the joint
distribution (ln y , ln α), Z , by utilizing 24:
i
h
ln y −µ
(y −rj )ρ Φ(pj )−(y −ri )ρ Φ(pi )
− µln α − λσln α σlny ln y
ln
ρ
ρ
ρ
ρ
gi −gj +κ(gj −gi )
√
Zij (y ) =
σln α 1 − λ2
(19)
Ardyanto Fitrady
The Impact of Decentralizing Public Good Provisions on Social W
Pareto optimum characterization
2
S ≡ [α, α
¯ ] × [y , y¯] ⊂ R+
h = hd (pi , gi , κg−i , y , α) for all i and (y , α)
(20)
(21)
Hs = Hs
pi
1 + ti
.
The household’s utility in city i is maximized over housing demand
V e (pi , gi , κg−i , y + r (y , α) − Ti , α)
≡ max U(y + r (y , α) − Ti − pi h, h, gi , κg−i ; α)
h
(22)
hd (pi , y + r (y , α) − Ti , gi , κg−i , α)
Back
Ardyanto Fitrady
The Impact of Decentralizing Public Good Provisions on Social W
The boundary locus between jurisdiction i and j
V˜i (pi , gi , κgj ) = V˜j (pj , gj , κgi )
(y − rj )ρ Φ(pj ) − (y − ri )ρ Φ(pi )
⇒α=
giρ − gjρ + κ(gjρ − giρ )
h (y − r )ρ Φ(p ) − (y − r )ρ Φ(p ) i
j
j
i
i
⇒ ln αij (y ) = ln
ρ
ρ
ρ
ρ
gi − gj + κ(gj − gi )
(23)
(24)
Back
Ardyanto Fitrady
The Impact of Decentralizing Public Good Provisions on Social W
Uj = U(xj , hj , gj , g−j ; α, κ)
Stage 3
Determining local public good level (gj ) and gross housing price (pj )
that satisfy:
pj = (1 + tj )psj
Z
fj (y , α)dy dα = tj psj Hsj (psj )
gj
(1)
xj = y − (1 + tj )psj hj (y , α)
(3)
(2)
S
Ardyanto Fitrady
The Impact of Decentralizing Public Good Provisions on Social W
Stage 2
Households maximize V (.) where (pj , gj ) satisfy equation (1) and
(2) taking as given (fj (y , α), hj (y , α), psj ).
Substituting (1) to (3) and (3) to utility function, we obtain:
V (pj , gj , κg−j , y , α) = U(y − pj hj (y , α), hj (y , α), gj , κg−j ; α)
Ardyanto Fitrady
The Impact of Decentralizing Public Good Provisions on Social W
Stage 1
HHs choose jurisdictions and housing consumption:
h = hd (pi , y + r (y , α) − Ti , gi , κg−i , α), ∀ j and (y , α)
Housing
market clearance:
R
j j
h
(.)f
j (y , α)dy dα = Hs (ps )
S d
HHs maximize
V˜ (pj , gj , κg−j , y , α) = U(y − pj hd (.), hd (.), gj , g−j ; α, κ)
Back
Ardyanto Fitrady
The Impact of Decentralizing Public Good Provisions on Social W
Public Good Provisions on Social Welfare
Hotel Grand Hyatt, Nusa Dua - Bali
10-11 December 2015
Presented by:
Ardyanto Fitrady
Universitas Gadjah Mada
Motivations
The existences of spillover across jurisdictions generate
inefficiency and induces non-optimal public policy, such as
public good provision and taxation.
Investigating the relationship between degree of spillover and
potential gains from decentralization.
Ardyanto Fitrady
The Impact of Decentralizing Public Good Provisions on Social W
Research Questions
1
How can we model the impact of fiscal decentralization on
social welfare when the spillovers exist in the context of an
urban economy?
2
Does fiscal decentralization benefit cities and society when
some degree of spillover is present?
3
Are the results for developed countries consistent with the
results for developing countries?
Ardyanto Fitrady
The Impact of Decentralizing Public Good Provisions on Social W
Literature reviews
Samuelson (1954) provided conditions for allocative efficiency
for public good provision. In general, we have no reason to
believe that public goods will be provided efficiently.
Tiebout (1956) conjectured that competition among publicly
elected governments for mobile households may yield an
efficient provision of local public goods.
Barr and Davis (1966) provided some of the foundations for a
political theory of local expenditures.
Oates (1972) showed that fiscal federalism is pareto optimum
and efficient if there are no spillovers among jurisdictions.
Definition
Ardyanto Fitrady
The Impact of Decentralizing Public Good Provisions on Social W
Literature reviews
Bewley (1981) shows theoretically that Tiebout equilibrium is
not pareto optimum or T.E. will only achieve social optimum
in a very specific and restricted assumptions.
Besley and Coate (2003) provides a theoretical framework for
centralized vs. decentralized provision of local public good
from a political economy approach.
Calabrese, Epple, Romano (2012) demonstrates that
decentralization is less efficient than centralization using
theoretical model and calibrations.
Ardyanto Fitrady
The Impact of Decentralizing Public Good Provisions on Social W
Contributions
Gaps in literature:
In urban economy context, there are extensive work on externality/spillover and on decentralization as separate topics. However,
to the best of my knowledge, there is no literature that discuss the
impact of various levels of spillover and fiscal decentralization on
welfare in the context of urban economy.
Ardyanto Fitrady
The Impact of Decentralizing Public Good Provisions on Social W
Model
Setting:
There are four agents in the model: households, housing
owners, local governments and a central government.
MA is divided into J jurisdictions
MA which consists of J jurisdictions, each of them has fixed
boundaries
Each jurisdiction has a local housing market, provides (fully
congested) public good, g , and charges property taxes, t
local PG provision and the property tax rate are determined
by majority rule in each jurisdiction
Households are renters and housing is owned by absentee
landlords
There is a continuum of households (y , α)
Households behave as price takers and have preferences
defined over a local public good, and housing services, h.
There are spillovers (positive externalities) of local public
goods across jurisdictions.
Ardyanto Fitrady
The Impact of Decentralizing Public Good Provisions on Social W
Keys
The impact of spillover
Spillover = [0, 1]
Ui = U(xi , hi , gi , κg−i ; α)
Ui = [βx x ρ + βh hρ + βgi (α)giρ + βgj (α)κgjρ ]1/ρ
Ardyanto Fitrady
The Impact of Decentralizing Public Good Provisions on Social W
Decentralized Policy
Agents:
Households
Homeowners
Governments
Stages:
Stage 1 HHs choose a jurisdiction and rent a house in a
jurisdiction
Stage 2 they vote in the corresponding jurisdiction for property tax
that used to finance the local PG
Stage 3 local PG is determined from local gov’t budget balance
Equations
Ardyanto Fitrady
The Impact of Decentralizing Public Good Provisions on Social W
Pareto optimum characterization
S ≡ [α, α]
¯ × [y , y¯] ⊂ R+2
More
max
J hZ
X
r (y ,α),ai (y ,α),R,Ti ,ti ,pi ,gi ,g−i
i=1
ω(y , α)Vie (pi , gi , κg−i , y + r (y , α) − Ti , α)
S
Z
ai (y , α)f (y , α) dy dα + ωR R/J +
pi /(1+ti )
0
Hsi (z) dz
i
(1)
subject to:
Z
R + r (y , α)f (y , α) dy dα = 0
S
Z
i
hd (pi , y + r (y , α) − Ti , gi , κg−i , α)ai (y , α)f (y , α) dy dα
(2)
S
= HSi (pi /(1 + ti ))
Z
ti p i
HSi (pi /(1 + ti ))
Ti
ai (y , α)f (y , α) dy , dα +
1
+ ti
S
Z
ai (y , α)f (y , α) dy dα
= gi
(3)
(4)
S
Ardyanto Fitrady
The Impact of Decentralizing Public Good Provisions on Social W
ai (y , α) ∈ [0, 1] ,
J
X
i=1
κ ∈ [0, 1]
ai (y , α) = 1
∀(y , α)
(5)
(6)
Ardyanto Fitrady
The Impact of Decentralizing Public Good Provisions on Social W
First-order Conditions
∂L
=Ω + ωR = 0
∂R
J
J
X
∂L X
=
ωU1i ai +
ηi (hdi )2 ai + Ω = 0
∂r
i=1
i=1
∂L
∂ai
∂L
∂Ti
∂L
∂ti
∂L
∂gi
∂L
∂g−i
∂L
∂pi
(7)
(8)
=ωVie + ηi hdi − λi (Ti − gi ) = 0
(9)
= − ωU1i − ηi (hdi )2 + λi = 0
(10)
(1 + ti ) i
= − ωR + λi (1 − ti εis ) + ηi
εs = 0
pi
Z
Z
Z
ai f dy dα = 0
= ωU3i ai f dy dα + ηi (hdi )3 ai f dy dα − λi
S
S
(11)
(12)
S
=ωU4i κ + ηi (hdi )4 δ = 0
(13)
Z
Z
1 + ti
+ ωR + λi ti (1 + εis )
= ηi (hdi )1 ai f dy dα − ωU1i hdi ai f dy dα
Hsi
S
S
− ηi
(Hsi )′
=0
Hsi
(14)
Ardyanto Fitrady
The Impact of Decentralizing Public Good Provisions on Social W
Indirect utility function
max [βx x ρ + βh hρ + αgiρ + ακgjρ ]1/ρ
h
hd =
y −r
1
(p ββxh ) 1−ρ
(16)
+p
V˜ (.) = [(y − r )ρ Φ(p) + αgiρ + ακgjρ ]1/ρ
Φ(p) =
βx
1
1 + (p ββxh ) ρ−1
+
(15)
βh (p ββxh )
(17)
ρ
ρ−1
1
[1 + (p ρ ββxh ) ρ−1 ]ρ
(18)
Boundary locus
Ardyanto Fitrady
The Impact of Decentralizing Public Good Provisions on Social W
Parameters
Table: Parameters for Each MA
Parameter
ncom
µlny
σlny
βh
βx
ρ
γ
θ
κ
United States
5
10.5171
0.8862
0.3559
1
-0.01
0.25
3
0 to 1
Ardyanto Fitrady
Indonesia
5
9.8614
0.8310
0.3959
1
-0.01
0.37
1.7
0 to 1
The Impact of Decentralizing Public Good Provisions on Social W
Results: Head Tax
Spillover and welfare in a
head-tax world, MA in US
When the spillover is relatively
low, the benefit from having
positive spillover (from other
jurisdictions) dominates the
cost of having ”non-optimal”
tax rates and public good
provisions.
As the degree of spillover
increases, the potential gain of
decentralization declines.
1650
1600
Potential gain (US$)
1550
1500
1450
1400
1350
1300
1250
0
0.1
0.2
0.3
0.4
0.5
κ
0.6
0.7
0.8
0.9
1
Ardyanto Fitrady
In a different context, this
result substantiates Besley and
Coate (2003) that there is a
critical value of spillover where
centralization dominates
decentralization.
The Impact of Decentralizing Public Good Provisions on Social W
Results: Head Tax
Spillover and welfare in a
head-tax world, MA in Indonesia
As the spillover increases, the
potential lost of
decentralization also increases.
The impact of spillover is more
moderate than in US case
−1200
Potential gain (US$)
−1250
Relatively insignificant impact
on welfare gain when the
spillover level is relatively low
(0 ≤ κ ≤ 0.3)
−1300
−1350
−1400
−1450
0
0.1
0.2
0.3
0.4
0.5
κ
0.6
0.7
0.8
0.9
1
Ardyanto Fitrady
It resonates Oates’
decentralization theorem
(1972).
The Impact of Decentralizing Public Good Provisions on Social W
Results: Property Tax
Spillover and welfare in a
property-tax world, MA in US
As the spillover increases,
the potential lost of
decentralization also
increases.
0
Potential gain (US$)
−100
It resonates Oates’
decentralization theorem
(1972).
−200
−300
−400
−500
−600
0
0.1
0.2
0.3
0.4
κ
0.5
0.6
0.7
0.8
0.9
Ardyanto Fitrady
The Impact of Decentralizing Public Good Provisions on Social W
Results: Property Tax
Spillover and welfare in a
property-tax world, MA in
Indonesia
As the spillover increases, the
potential lost of
decentralization also increases.
Decentralization is more
favorable when there is no
spillover or when spillover is
low
560
550
Potential gain (US$)
540
530
This result substantiates the
idea of Oates’ decentralization
theorem (1972).
520
510
500
490
480
470
0
0.1
0.2
0.3
0.4
0.5
κ
0.6
0.7
0.8
0.9
1
Ardyanto Fitrady
The Impact of Decentralizing Public Good Provisions on Social W
Results: For different income levels
Income level and welfare change
at various degrees of spillover,US
2400
2200
Potential Gain(US$)
2000
1800
1600
1400
1200
1000
800
600
400
10.6
10.5
µln y
10.4
0
0.2
0.4
0.6
0.8
1
κ
Ardyanto Fitrady
When the mean income is
relatively low, a higher spillover
level will decrease the benefit
from decentralization
When the mean income is
relatively high, a higher
spillover level will increase the
benefit from decentralization
There is an indication that an
economy with higher mean
income will gain more benefit
from decentralized tax policy
at various level of spillover
level, ceteris paribus.
The Impact of Decentralizing Public Good Provisions on Social W
Income level and welfare change at various degrees of spillover
2400
2200
µln y=10.6
2000
Potential Gain(US$)
1800
1600
1400
µln y=10.5
1200
1000
800
600
400
0
µln y=10.4
0.2
0.4
κ
0.6
Ardyanto Fitrady
0.8
1
The Impact of Decentralizing Public Good Provisions on Social W
Results: For different inequality
Inequality and welfare change at
various degrees of spillover
When the inequality is high, the
impact of spillover on the benefit
from decentralization become
more inconclusive (depends on
the spillover).
2000
Potential Gain(US$)
As inequality increases, the
potential gain of decentralization
is linearly higher.
1500
1000
500
0.9
1
0.8
0.85
0.6
0.4
σln y
0.8
0.2
0
κ
Urban decentralization tends to
be accompanied by significant
increases in income inequality
(Wheeler, 2006).
Rich countries benefit from
decentralization with regard to a
more equal regional income
distribution but stimulate higher
inequality in developing countries
(Lesmann, 2011).
Ardyanto Fitrady
The Impact of Decentralizing Public Good Provisions on Social W
Income level and welfare change at various degrees of spillover
1800
1600
σln y=0.9
Potential Gain(US$)
1400
1200
1000
800
600
σln y=0.8
400
0
0.2
0.4
κ
0.6
Ardyanto Fitrady
0.8
1
The Impact of Decentralizing Public Good Provisions on Social W
Conclusions
Spillover level does affect the potential gain of
decentralization.
In the case of efficient taxation, the impacts of spillover are
ambiguous:
Relatively low level of spillover has a positive impact on the
potential gain of decentralization.
Relatively high level of spillover has a negative impact on the
potential gain of decentralization in both developed and
developing countries.
In property-tax case, any degree of spillover has negative
impact on the potential gain from decentralization.
Ardyanto Fitrady
The Impact of Decentralizing Public Good Provisions on Social W
In general, the results substantiate Oates’ decentralization
theorem
However, the impact of spillover level on the potential gain of
decentralization varies across different level of income vis-`a-vis
income inequality.
Spillover hurts MA with lower income more than MA with
higher income.
a higher level of inequality amplifies the benefit of
decentralization, which illustrates that developed
countries—that generally have higher income
inequality—potentially gain more benefits from
decentralization.
Ardyanto Fitrady
The Impact of Decentralizing Public Good Provisions on Social W
Policy implications
Policy makers should be aware that decentralization may
generate loss to the society.
The results suggest that some taxes might be better to
remain under centralized policy.
As the consequence of spillover, coordination among
jurisdictions is very important to minimize the cost of spillover
in the metropolitan area. Consolidating the resources and
coordination in choosing the type and level of public good
provision are potentially beneficial to all jurisdictions in the
metropolitan area and will minimize the cost of spillover and
potential costs of duplication.
Ardyanto Fitrady
The Impact of Decentralizing Public Good Provisions on Social W
APPENDIX
Ardyanto Fitrady
The Impact of Decentralizing Public Good Provisions on Social W
Fiscal Decentralization
Fiscal federalism is a general normative framework for
assignment of functions to the different levels of government
and appropriate fiscal instruments for carrying out these
functions (Oates, 1999)
Fiscal decentralization is the devolution by the central
government to local governments (states, regions,
municipalities) of specific functions with the administrative
authority and fiscal revenue to perform those functions (Kee,
2003)
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Ardyanto Fitrady
The Impact of Decentralizing Public Good Provisions on Social W
Standardized value of joint distribution
To calculate community populations and incomes, we use the result from Epple (1999) to get the standardized value of the joint
distribution (ln y , ln α), Z , by utilizing 24:
i
h
ln y −µ
(y −rj )ρ Φ(pj )−(y −ri )ρ Φ(pi )
− µln α − λσln α σlny ln y
ln
ρ
ρ
ρ
ρ
gi −gj +κ(gj −gi )
√
Zij (y ) =
σln α 1 − λ2
(19)
Ardyanto Fitrady
The Impact of Decentralizing Public Good Provisions on Social W
Pareto optimum characterization
2
S ≡ [α, α
¯ ] × [y , y¯] ⊂ R+
h = hd (pi , gi , κg−i , y , α) for all i and (y , α)
(20)
(21)
Hs = Hs
pi
1 + ti
.
The household’s utility in city i is maximized over housing demand
V e (pi , gi , κg−i , y + r (y , α) − Ti , α)
≡ max U(y + r (y , α) − Ti − pi h, h, gi , κg−i ; α)
h
(22)
hd (pi , y + r (y , α) − Ti , gi , κg−i , α)
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The Impact of Decentralizing Public Good Provisions on Social W
The boundary locus between jurisdiction i and j
V˜i (pi , gi , κgj ) = V˜j (pj , gj , κgi )
(y − rj )ρ Φ(pj ) − (y − ri )ρ Φ(pi )
⇒α=
giρ − gjρ + κ(gjρ − giρ )
h (y − r )ρ Φ(p ) − (y − r )ρ Φ(p ) i
j
j
i
i
⇒ ln αij (y ) = ln
ρ
ρ
ρ
ρ
gi − gj + κ(gj − gi )
(23)
(24)
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Ardyanto Fitrady
The Impact of Decentralizing Public Good Provisions on Social W
Uj = U(xj , hj , gj , g−j ; α, κ)
Stage 3
Determining local public good level (gj ) and gross housing price (pj )
that satisfy:
pj = (1 + tj )psj
Z
fj (y , α)dy dα = tj psj Hsj (psj )
gj
(1)
xj = y − (1 + tj )psj hj (y , α)
(3)
(2)
S
Ardyanto Fitrady
The Impact of Decentralizing Public Good Provisions on Social W
Stage 2
Households maximize V (.) where (pj , gj ) satisfy equation (1) and
(2) taking as given (fj (y , α), hj (y , α), psj ).
Substituting (1) to (3) and (3) to utility function, we obtain:
V (pj , gj , κg−j , y , α) = U(y − pj hj (y , α), hj (y , α), gj , κg−j ; α)
Ardyanto Fitrady
The Impact of Decentralizing Public Good Provisions on Social W
Stage 1
HHs choose jurisdictions and housing consumption:
h = hd (pi , y + r (y , α) − Ti , gi , κg−i , α), ∀ j and (y , α)
Housing
market clearance:
R
j j
h
(.)f
j (y , α)dy dα = Hs (ps )
S d
HHs maximize
V˜ (pj , gj , κg−j , y , α) = U(y − pj hd (.), hd (.), gj , g−j ; α, κ)
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Ardyanto Fitrady
The Impact of Decentralizing Public Good Provisions on Social W