The Finnish regional government reform currently under consideration will create a new tier of regional county governments, which will be responsible mainly for the provision of health and social care services. On the revenue side, counties will be financed mostly through grants from the central government and out-of-pocket payments (i.e. client fees). The funding model of the counties raises a number of questions from the point of view of the fiscal federalism literature. One important question in particular is: what kind of incentives will centrally-allocated funding create for the regional governments? One concern raised is that this type of financing structure will create a soft budget constraint for the counties. In other words, the county governments will expect that the central government will provide them with additional resources if they surpass their allocated budget. This paper discusses the potential for soft budget constraints (SBC) in the newly-created Finnish counties, by reviewing contributions from the fiscal federalism literature. Besides providing the overview of the relevant literature, we highlight the determinants of SBC problem most relevant for the Finnish regional government reform and possible solutions. One important conclusion from our discussion is that decentralizing spending alone can lead to softer budget constraints and overspending for the regional governments, due to the vertical fiscal imbalances that it creates. In other words, the spending responsibilities of the county governments might be too large for their revenue-generating possibilities. One channel through which the proposed funding system softens the budget constraint is the possibility for local governments to “blame” the central government for the deficits or fiscal troubles. According to the literature, this problem is particularly relevant for the health care services, since it touches a politically sensitive issue. Another interesting conclusion from our discussion is that it might simply be impossible for the central government to commit to a no-bailout policy. In the case of health and social care provision in Finland, the central government might even explicitly commit to increasing resources ex ante if services are at risk. In this case, the literature suggests having pre-determined mechanisms around the bailouts. Possibilities include mandated austerity measures as conditions for the bailout, or direct central oversight. These measures seem to improve local public finances. Our findings from the fiscal federalism literature also suggest that the reform should proceed with additional tax autonomy at the county level, since that would limit the soft budget constraints and improve the fiscal performance of counties.

The Finnish regional government reform currently under consideration will create a new tier of regional county governments, which will be responsible mainly for the provision of health and social care services. On the revenue side, counties will be financed mostly through grants from the central government and out-of-pocket payments (i.e. client fees). The funding model of the counties raises a number of questions from the point of view of the fiscal federalism literature. One important question in particular is: what kind of incentives will centrally-allocated funding create for the regional governments? One concern raised is that this type of financing structure will create a soft budget constraint for the counties. In other words, the county governments will expect that the central government will provide them with additional resources if they surpass their allocated budget. This paper discusses the potential for soft budget constraints (SBC) in the newly-created Finnish counties, by reviewing contributions from the fiscal federalism literature. Besides providing the overview of the relevant literature, we highlight the determinants of SBC problem most relevant for the Finnish regional government reform and possible solutions. One important conclusion from our discussion is that decentralizing spending alone can lead to softer budget constraints and overspending for the regional governments, due to the vertical fiscal imbalances that it creates. In other words, the spending responsibilities of the county governments might be too large for their revenue-generating possibilities. One channel through which the proposed funding system softens the budget constraint is the possibility for local governments to “blame†the central government for the deficits or fiscal troubles. According to the literature, this problem is particularly relevant for the health care services, since it touches a politically sensitive issue. Another interesting conclusion from our discussion is that it might simply be impossible for the central government to commit to a no-bailout policy. In the case of health and social care provision in Finland, the central government might even explicitly commit to increasing resources ex ante if services are at risk. In this case, the literature suggests having pre-determined mechanisms around the bailouts. Possibilities include mandated austerity measures as conditions for the bailout, or direct central oversight. These measures seem to improve local public finances. Our findings from the fiscal federalism literature also suggest that the reform should proceed with additional tax autonomy at the county level, since that would limit the soft budget constraints and improve the fiscal performance of counties.

Governments spend large amounts of money to attract firms to their territory, often resulting from bidding wars against other regions. Previous papers show that such bidding wars can improve social welfare by allocating the investment to the regions that value it the most. In this paper, we depart from the usual assumption of exogenous, single-plant investment. We show that in this context, bidding wars incite the firm to allocate its investment strategically, by investing more and differentiating the plants. In turn, the firm receives larger subsidies. Despite these distortions, bidding wars may remain socially optimal, as in simpler models.

Using a laboratory experiment with nested local and global public goods, we analyze the stability of global groups when individuals have the option to separate, according to the degree of decentralization of decision-making. We show that increasing the number of decisions made at the local level within a smaller group reduces the likelihood that individuals vote in favor of a configuration that includes no global good for interacting only within their local group. Voting for such a configuration is more likely when global group members are less cooperative and local group members are more cooperative. Reinforcing local group identity has no impact on votes.

This paper studies voters' preferences on municipal borders in a setting with cohabiting linguistic communities. It takes advantage of unique data from referendum results in the Canadian province of Quebec in 2004, which allows a direct investigation of voter preferences. I find that differences in income and language affect the likelihood of secession. Notably, I also find that these effects are interdependent, suggesting that the support for a local secession is affected to some degree by out-group aversion. Finally, I find that voters are willing to pay additional taxes to live in their jurisdiction of choice.

We analyze implications of market size for market structure in the charity sector. While a standard model of oligopolistic for-profit competition predicts a positive relationship between market size and firm size, our analogous model of competition between prosocially motivated charities predicts no such correlation. If charities are biased towards their own provision, a positive association between market size and provider size can arise. We examine these predictions empirically for six different local charity markets. Our empirical findings suggest that charities do not solely pursue prosocial objectives, and that increased competition in the charity sector can lead to rationalization in provision.

We study the effects of municipal mergers on voter turnout in a difference-in-differences framework, using data from a wave of municipal mergers in Finland in 2009. Analysing two pre-merger elections and three post-merger elections, spanning a total of 17 years, we find that municipal mergers decrease voter turnout by 4 percentage points in the long run in the relatively small municipalities compared to similar small municipalities that did not merge. As the average turnout rate prior to merging in this group was around 69%, this is a substantial effect. We also find that virtually nothing happens to turnout in the municipalities that were relatively large within their merger. Furthermore, mergers are associated with a decrease in voters' political efficacy and turnout decreases more in those municipalities that experience larger decreases in efficacy.

We propose a model of competition between local governments to attract new investment. The main contribution of this paper is to consider firms as multi-establishment firms, an oversight in the current literature. The model shows that it is always in the firm’s best interest to split her investment in two asymmetric plants (or establishments).

The impact of the fragmentation of executive and legislative bodies on the level and composition of government expenditure is a feature of politics that has attracted considerable attention from economists. However, previous authors have abstracted from two important concepts: ideology and intra-party politics. In this paper, we account for these two phenomena explicitly, and make two main contributions. First, we show that both intra- and inter-party ideological dispersion matter in explaining the level of sub-national public spending. Therefore, it is improper to consider parties as monolithic entities. We also show that ideological dispersion matters especially for current expenditures, and not so much for investment expenditures. To do so, we construct a panel database (2003–2010) comprising data from a survey that quantifies the policy preferences of party members who were candidates in Swiss elections.

Buchanan and Faith (1987) compared state secession to a road not travelled. Although it is true that this road is not often travelled, some states did decide to follow their own path in the past. Numerous authors proposed theories to explain the factors leading to secession, all underlining the opposition between economies of scale and heterogeneity of preferences. However, it has been difficult to test their predictions empirically, or to quantify these factors relative to each other. This paper uses data from a unique policy event in Canada to test this theory. Specifically, I use a set of 213 municipalities that were offered the opportunity (by referendum) to secede from a newly-formed agglomeration. I find that both language and income heterogeneity are significant factors in the citizens’ voting decision. I also investigate the existence of interaction effects between these two types of heterogeneity, and whether different types of public spending before the mergers affect the probability of secession more than others.

The goal of this report is to investigate the relationship between educational attainment, remoteness, and labour market and economic performance at the reserve level for Aboriginal Canadians. The report uses reserve-level data on average earnings, GDP per capita, labour market indicators and distance to a service centre for 312 reserves. Using descriptive statistics, simple correlation and multiple regression analysis, the report draws conclusion on four important questions. First, the report finds that a higher level of educational attainment, on average, has a positive effect on the labour market performance of a reserve. Then, a positive link is found between educational attainment and economic performance (average earnings and GDP per capita). Also, the report finds evidence that remoteness of a reserve plays a role in its labour market and economic performance. Specifically, reserves situated near urban centres fare better than the ones in rural/remote areas and those not connected by road to a service centre all year long (special access). However, when controlling for characteristics of reserves, the very remote reserves seem to fare better than expected in comparison to urban reserves. Yet, when an instrumental variable is used to account for the possibility that educational attainment is endogenous in the model, the remoteness of a reserve appears to play no role in determining reserve labour market or economic performance. Finally, the report also analyses the role of governance on labour market and economic performance. It finds that better governance is correlated to better labour market performance, higher average earnings and higher GDP per capita.

Investing in disadvantaged young people is one of the rare public policies with no equity-efficiency tradeoff. Based on the methodology developed in Sharpe, Arsenault and Lapointe (2007), we estimate the effect of increasing the educational attainment level of Aboriginal Canadians on labour market outcome and output up to 2026. We build on these projection to estimate the potential effect of eliminating educational and social gaps between Aboriginal and non-Aboriginal people on government spending and government revenues using population and economic projections to 2026.

Investing in disadvantaged young people is one of the rare public policies with no equity-efficiency tradeoff. This report estimates the potential benefit for the Canadian economy of increasing the educational attainment level of Aboriginal Canadians. We find that increasing the number of Aboriginals who complete high school is a low-hanging fruit with significant and far-reaching economic and social benefits for Canadians. Not only would it significantly contribute to increase the personal well-being of Aboriginal Canadians, but it would also contribute somewhat to alleviating two of the most pressing challenges facing the Canadian economy: slower labour force growth and lackluster labour productivity growth. In fact, we find that in the best case scenario where by 2017 the educational attainment and the labour market outcomes at a given level of educational attainment of Aboriginal Canadians reach the same level non-Aboriginal Canadians had in 2001, the potential contribution of Aboriginal Canadians is up to an additional cumulative $160 billion (2001 dollars) over the 2001-2017 period. That represents an increase of $21.5 billion (2001 dollars) in 2017 alone. Moreover, the potential contribution of Aboriginal Canadians to the total growth of the labour force between 2001 and 2017 is projected to be up to 7.39 per cent of the total labour force growth, much higher than their projected 3.37 per cent share of the working age population in 2017. Finally, we find that the potential contribution of Aboriginal Canadians to the annual growth rate of labour productivity in Canada is up to 0.037 percentage point.

Investing in disadvantaged young people is one of the rare public policies with no equity- efficiency tradeoff. The objective of the paper is to estimate the potential contribution of Aboriginal Canadians to labour force, employment, output, and productivity growth in Canada over the 2006-2026 period. We first examine the developments in educational attainment, labour force participation and income of aboriginal and non-aboriginal Canadians between 2001 and 2006 using the recently released 2006 census data. Then, using the methodology developed in Sharpe, Arsenault and Lapointe (2007), we estimate the potential benefit for the Canadian economy of increasing the educational attainment level of Aboriginal Canadians. We extend the original analysis five years to cover the 2006-2026 period. We find that increasing the number of Aboriginals who complete high school continues to be a low-hanging fruit and that significant and far-reaching economic and social benefits can still be realized. We present estimates of the extent to which increased Aboriginal education could contribute to alleviating two of the most pressing challenges facing the future of the Canadian economy: slower labour force growth and lackluster labour productivity growth. We find that under certain scenarios, a rapid convergence in educational attainment between Aboriginal Canadian and non-Aboriginal Canadians would not only significantly contribute to increase the personal well-being of Aboriginal Canadians, but would also lead to increased GDP, employment and productivity growth. References