We build an infinite horizon equilibrium model of fiscal federation, where anticipation of transfers from the central government creates incentives for local governments to overborrow. Absent commitment, the central government over-transfers, which distorts the central-local distribution of...

This paper develops a dynamic infinite-horizon model with two layers of governments to study theoretically and quantitatively how fiscal decentralization affects local and central government debt accumulation and spending. In the model, the central government makes transfers to local governments...

Aligning the interests of local governments with market development is an important issue for developing and transition economies. Using a panel data set from China, we investigate the relationship between provincial government's fiscal incentives and provincial market development. We report...