Date of Award

Spring 5-15-2010

Degree Type

Dissertation

Degree Name

Doctor of Philosophy (PhD)

Department

Economics

First Advisor

Jorge L. Martinez-Vazquez

Second Advisor

Jonathan C. Rork

Third Advisor

James R. Alm

Fourth Advisor

Charles R. Hankla

Abstract

This dissertation consists of two independent essays on public economics. The first essay studies the consequences of fiscal decentralization on poverty and income inequalities. This essay describes the possible channels through which fiscal decentralization might affect poverty and income inequalities, and carries out an empirical analysis with data of a large number of countries at different stages of development, for the period 1971-2000. Fiscal decentralization is found to have significant effects on poverty and income inequalities. These findings are important because they suggest, contrary to the traditional public finance theory, that sub-national governments can play an important role in the reduction of poverty and income inequalities. The second essay studies the second best solution to the public expenditures’ problem in the presence of a proportional labor income tax. By allowing the tax base to vary with the taxpayers’ behavioral responses to taxation, we derive the “effective” budget constraint faced by the government, which describes the set of affordable combinations of public and private goods. We show that the optimal solution to the government problem corresponds to the point of tangency between the effective budget constraint and the highest attainable social indifference curve. The traditional normative prescription for public expenditures under a second-best scenario does not satisfy this condition, and therefore it provides a suboptimal solution. Finally, we use the same analytical framework in order to explain the flypaper effect, an empirical regularity that has for long challenged the conventional theory.

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Economics Commons

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