Work

Unemployment, Fiscal Competition, and the Composition of Public Expenditure

Year: 2025

Type: article

Abstract: This paper investigates the efficiency of equilibrium policies and public expenditure composition under labor market imperfection in a fiscal competition model. The sources of the inefficiency in supplying public goods and inputs with a capital tax are the employment stimulus and fund-raising effects of public inputs and fiscal and employment externalities. Public goods and public inputs are provided optimally if public expenditures are financed by capital and lump-sum taxes. However, if the capital tax is solely available, then public goods and public inputs can be either undersupplied or oversupplied in the second-best sense because jurisdictional governments seek to attract capital and create employment and tax revenues. Hence, in contrast to reports of the earlier literature on fiscal competition, an increase in public input expenditure financed by a decrease in public goods expenditure improves social welfare, depending on the inefficiencies of public goods and public input supplies.

Source: Public Finance Review

DOI: 10.1177/10911421251346858

Authors: Yuya Kikuchi, Arihiro Kuzawa, Toshiki Tamai

Institutions: Seijo University, Aichi Prefectural Government, Nagoya University

Language: English

Topic: Local Government Finance and Decentralization

Subfield: Political Science and International Relations

Field: Social Sciences

Domain: Social Sciences

SDG: Decent work and economic growth

Open Access status: green

Funder: Japan Society for the Promotion of Science