№ 1/2018

№ 1/2018

Nauk. pr. NDFI 2018 (1): 5–18https://doi.org/10.33763/npndfi2018.01.005

PUBLIC FINANCES

YASTREMSKYI Olexandr ¹

¹SESE “The Academy of Financial Management”
OrcID ID : https://orcid.org/0000-0001-9900-3612

Behavior in group: fiscal decentralization case

The article presents a behavioral model of fiscal decentralization. The model combines ideas of general equilibrium and non-cooperative behavior. Computation results are presented and analyzed. One of the objectives of the decentralization in Ukraine is a change in behavior of subgovernments, local power, and communities. The experience of many countries shows that enormous intergovernmental transfers imply deterioration of behavior of local power. A known free-rider problem occurs. The latter is the case of non-cooperative behavior. One outcome is a decrease in labor activity of the community members. In some cases non-cooperative behavior is a source of tax avoiding. The main approach of the paper is a coalescence of ideas of general and Nash equilibria. Critical assumptions of the proposed model are households of a local community which elect (appoint) local subgovernments. The latter reflect the households’ interests; the household welfare level is measured by utility function, depending on income and labor burden; the household income consists of own income, depending on the activity level, transfer minus tax, which implies a possibility of non-cooperative behavior of households. The equilibrium behavior of households is determined by Nash optimum and general equilibrium conditions (producers’ profit maximization, perfect competition). A model endogenous parameter is a share of transfer in GDP. Preferences of households are presented by Stone-Geary utility function. Production possibilities of the economy are modeled by Cobb-Douglas production. Numerical computations are made under simplified assumptions. Among them are the single industry case, no mobility of capital. The study is based on the data of 2014. The main outcome of computation is a positive relationship between GDP and the level of decentralization. A decrease in share of intergovernmental transfer implies an increase in GDP. The paper proposes different ways of results development.

Keywords:behavior, free-rider problem, Mao Big Caldron, general equilibrium, Nash optimum, financial decentralization

JEL: D01, D03, D13, H71, H77

Yastremskyi O. . Behavior in group: fiscal decentralization case / O. Yastremskyi // Наукові праці НДФІ. - 2018. - № 1. - C. 5-18.

Article original in Ukrainian (pp. 5 - 18)

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