Efficient Earmarking under Decentralized Fiscal Commitments (Forthcoming, International Tax and Public Finance)

posted Sep 2, 2015, 3:08 AM by Adriana M
Abstract: Earmarked federal grants are ubiquitous and significant. Traditional fiscal
federalism is unable to explain these grants’ widespread utilization. Recent arguments
focusing on the potential benefits of centralized earmarking in reducing incentives for the
creation of soft budgets at sub-central government levels merit formalization. I show that
universal earmarking improves the efficiency of a federation in which regional
governments are able to commit to provision of all regional public goods. However,
efficient earmarking need not be universal: it should only involve private consumption and
fiscal budgets for public goods subject to decentralized fiscal commitments.