Old and New Theories of Fiscal Federalism, Organizational Design Problems, and Tiebout

This work is a contribution to the Second Generation Theory (SGT) of fiscal federalism that studies fiscal federalism through contemporary economic and industrial organization theory. First, it establishes context by introducing the two classic motivations in support of federalism, namely, incentives and knowledge. Second, it succinctly discusses the incentive-based organizational approach of the SGT. Third, it shows that the Tiebout model already embeds an organizational approach, which instead rests on a knowledge motivation. The underlying theme is that the SGT should include both the incentive and knowledge motivations for fiscal decentralization.