[size=33.3333px]Incentives to provide local public goods:[size=33.3333px]Fiscal Federalism, Russian Style*[size=23.3333px]

[size=23.3333px]Ekaterina V. Zhuravskaya
Harvard University May 12, 1998

Abstract
This  paper  investigates  how  the  institutional  structure  of  the  government  affects  theincentives  of  local  governments  to  provide  public  goods  both  to  individuals  andprivate businesses.  Using a unique  data  set  on  budgets  of  Russian  cities,  I  show thatthe existing  revenue  sharing  schemes  between  regional  and  local  governments  providelocal  governments  with  no  fiscal  incentive  to  increase  their  tax  base  and,  therefore,  tofoster the growth of businesses.  The main result is that  in Russia, any change  in  localgovernment’s  own  revenues  is  almost  entirely  offset  by  changes  in  shared  revenues.This  situation  leads  to  predatory  governmental  behavior  towards  private  businesses.This  finding  is  compared  to  the  structure  of  federalism  in  China,  where  fiscalincentives  are  very  strong.    Some  evidence  is  provided  that  local  governments’  fiscalincentives are an important determinant of (1) the formation of  private  businesses,  (2)the allocation  of  local  public  finances  among  different  uses,  and  (3)  the  efficiency  ofpublic goods provision at the local level.  These findings shed some light on the puzzleof  why   Russia  has  grown  more  slowly  and  has  less  efficient  public  goods  provision,compared to other countries undertaking economic reforms.

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