Fiscal centralization vs. decentralization on economic growth and welfare: An optimal-control approach

Xiangyu  Ge; Tifang  Ye; Yanli  Zhou; Guoguang  Yan

doi:10.3934/jimo.2016.12.487

Article Contents

2016, Volume 12, Issue 2: 487-504. Doi: 10.3934/jimo.2016.12.487

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Fiscal centralization vs. decentralization on economic growth and welfare: An optimal-control approach

1.
School of Statistics and Mathematics, Zhongnan University of Economics and Law, Wuhan 430073
2.
School of Finance, Zhongnan University of Economics and Law, Wuhan 430073

Received: September 30, 2014

Revised: January 31, 2015

Published: March 2016

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Abstract

In this paper, we study the economic growth and social welfare in an endogenous growth model with spillovers of public goods, leviathan taxation and imperfectly flow capital in heterogeneous economies. We show that the effect of spillovers and capital flow on economic growth and welfare is different for well endowed region and poorly endowed region under fiscal centralization and fiscal decentralization. We also show that a decentralized system dominates a centralized system in terms of economic growth no matter whether the region is well or poorly endowed. However, the difference between a decentralized system and a centralized system is ambiguous in social welfare. It is dependent on the degree of spillovers and capital flow no matter whether the region is well or poorly endowed.

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Mathematics Subject Classification: Primary: 90C90; Secondary: 49J15, 49L20.

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