Federal grants, local public-good provision, and consumption smoothing

Abstract

This paper addresses two very important, but usually neglected, aspects of Argentina's federal revenue-sharing system. The first aspect refers to the horizontal tensions present -in addition to the traditional vertical one of lack of fiscal correspondence- in the current system of revenue-sharing [Porto (1999)]. At the federal level, these horizontal tensions take the form of conflicting goals among Ministries regarding policy making in the provinces. For example, Ministries do not coordinate efforts to help provinces to solve the problem of financing the provision of local public-goods while achieving provincial fiscal balance. At the local -i.e. provincial- level horizontal tensions take the form of conflicting goals between the citizenry and an imperfectly controlled politician-bureaucrat who wants to minimize administrative effort and can, in this way, affect the (stochastic) cost of public good provision. The second aspect of the federal tax system that we want to address refers to the degree of risk-sharing between federal and local jurisdictions over uncertain outcomes; which is an important issue from the point of view of economic welfare. Risksharing was not explicitly discussed in the bilateral agreements that paved the way to the current federal revenue-sharing system, and it is not clear how to deal with it in future reforms of the system. Nicolini et al. (1999) find some evidence of risk-sharing motives in the management of ATNs, but they do not address explicitly the issue of private consumption smoothing, nor relate the problem of risk-sharing to the horizontal tensions aforementioned.