Abstract

In an important sense fiscal federalism model can be seen as a normative model whose aim is ideological. Its argument about costs and benefits of decentralization in government is based on the fact that decentralization allows better matching of public good supply and increases social welfare. But this is not true. Fiscal federalism model is a collection of old ideas that suggest that this organizational process generally increases efficiency in the allocation branch of the budget, but the possibility that negative externalities and inter institutional spill-overs, when taken into account, makes this proposition false. It is the opposite process, centralization, which causes positive externalities in the allocation to arise, satisfies the ends of political economy, stabilization and distribution, and decreases the size of government