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Fiscal Decentralization and Financial Condition: The Effects of Revenue and Expenditure Decentralization on State Financial Health
Abstract
Although there are strong theoretical arguments about both the benefits and costs of decentralization in the federalism literature, there is little on how second-order fiscal decentralization effects the financial health of state governments. This study examines this question and adds to the understanding of state-and-local fiscal relations. Using financial indicators that measure several dimensions of financial condition, the research estimates the effect of revenue and expenditure decentralization on state fiscal health. It finds that while state financial condition is unaffected by revenue decentralization, there is a curvilinear relationship between expenditure decentralization and long-term state financial condition.
... Theoretically, the impact of fiscal decentralization and the local fiscal condition is contradicting. On the one hand, increased access to resources is expected to better fiscal condition (Jimenez, 2009;Singla & Stone, 2018;Stone, 2015). As such, traditional fiscal federalism makes a case for fiscal decentralization as it enables efficient resource allocation that meets local preferences and costs (Oates, 2008). ...
This study explores the local fiscal condition in South Korea, which is a fiscally centralized system. Upon reviewing the local fiscal management systems operated by the central government, we find that the central government monitors and evaluates local fiscal condition to exercise control over the local management practices rather than to achieve actual financial improvements. The study also conducts empirical analyses using panel data from all 243 local governments between 2012 and 2021. Results suggest the importance of local governments’ managerial capacity in offsetting fiscal constraints under a fiscally centralized system. The study contributes to broadening the generalizability of fiscal condition theories and deepening the context-specific understanding of local fiscal condition.
... Revenue indicators show the level of authority local governments have over their own revenues. Expenditure indicators (decentralized expenditures) mean access to additional resources and stronger financial health (Oyun, 2017;Singla & Stone, 2018). Our measure considers both revenue and expenditure sides. ...
While existing studies have examined the separate effects of local governments’ internal conditions and external environment on local innovation, few have paid attention to their interactive effects. This study examines whether state-level rules regarding local discretion moderate the effects of city governments’ slack resources and learning, using local sustainability innovation as an example. We distinguish two types of discretion (fiscal and statutory) granted by state governments. Applying a difference-in-differences (DDD) approach with a longitudinal dataset of 238 U.S. cities, we find that fiscal discretion strengthens the positive effect of fiscal slack while statutory discretion enhances the positive effect of learning. The findings uncover the complex interactions between multilevel institutional arrangements and local innovation mechanisms.
... Previous research on state governments has suggests that states may have engaged in the redistribution of the burden for public services to governments within their borders (Bowman and Kearney 2011;Reschovsky 2004). Since the start of the Great Recession, the literature on fiscal health has often pointed to this shirking of responsibilities as a way for states to maintain their solvency (see Singla and Stone 2018;Yusuf, O'Connell, and Abutabenjeh 2011). As county governments are administrative branches of the state (see National Association of Counties 2008), states may be able to reduce their expenditures and improve their overall fiscal health by reassigning their responsibilities to the counties. ...
Governments frequently use financial incentives to encourage the creation, expansion, or relocation of businesses within their borders. Research on financial incentives gives little clarity as to what impact these incentives may have on governments. While incentives may draw in more economic growth, they also pull resources from government coffers, and they may commit governments to future funding for public services that benefit the incentivized businesses. The authors use a panel of 32 states and data from 1990 to 2015 to understand how incentives affect states’ fiscal health. They find that after controlling for the governmental, political, economic, and demographic characteristics of states, incentives draw resources away from states. Ultimately, the results show that financial incentives negatively affect the overall fiscal health of states.
... Johnson, Kioko, Sharon, and Hildreth (2012) find that several financial condition measures from government-wide reporting are associated with state credit rating levels. Using financial indicators that measure several dimensions of financial condition, Singla and Stone (2018) find a relationship between long-term financial condition and expenditure fiscal decentralization among 50 state governments from 2005 to 2013. These empirical studies have analyzed multiple financial condition ratios to add new information to the understanding of fiscal decisions or socioeconomic conditions. ...
This paper incorporates measurements of the four financial condition dimensions of cash, budget, long-run, and service solvency to explore the link between financial condition and public sector employment among states in the context of the Great Recession of 2008-2009. The finding is that the severity of this economic recession led states to reduce public workers as one type of fiscal response to cope with budget shortfalls. The results suggest that not all dimensions of state financial condition affect public sector employment.
Using data from the states’ annual comprehensive financial reports for the period 2003 to 2018, the authors apply a dynamic panel model frame to test how state tax and expenditure limitations (TELs) and rainy-day funds (RDFs) affect key aspects of the state fiscal condition. Guided by the fiscal illusion theory, we hypothesize that TELs and RDFs will affect various short-term solvency indicators but will not have a significant impact on pension and long-term solvency indicators. The study provides mixed empirical evidence, cautioning that these relations are complex. The results provide empirical evidence supporting most of the hypotheses related to short-term solvencies, such as cash and budgetary solvencies. In addition, the study finds that neither tax nor expenditure limitations have a significant impact on the net asset ratio and the long-term ratios. Similarly, there is evidence that TELs and RDFs do not affect the two pension solvency ratios. This is probably the first study to provide a dynamic panel model to assess how two major state fiscal institutions influence various state government’s short-term and long-term fiscal solvency conditions.
In efforts to better understand the financial condition of state and local government and to be better prepared for fiscal exigencies during crises, practitioners and academics alike strive to find a better way to assess governmental financial condition. Several models have been developed to evaluate state and local government over the past several decades, with significant limitations. We propose a more comprehensive framework to evaluate the fiscal health of state government based on these models. Further, we utilize the data from the annual comprehensive financial reports of state governments in the U.S. for 2003 to 2018 to demonstrate the applicability and usefulness of the modified model. The results are useful for state administrators and financial managers in their efforts to assess financial condition and fiscal administration and add to the literature on state fiscal health.
Resumo: Esta pesquisa teve como objetivo verificar se o indicador esforço tributário e o da autossuficiência financeira exercem influência positiva na condição financeira de municípios brasileiros. A amostra corresponde aos municípios com mais de 300 mil habitantes, totalizando 94 entes subnacionais, realizada no período de 2018 a 2021. Foi fundamentada com base na Teoria do Federalismo fiscal associada com a aplicação da análise da condição financeira com enfoque voltado ao setor público. Utilizou-se a nota CAPAG disponível no site da Secretaria do Tesouro Nacional como método de avaliação da condição financeira dos entes públicos. Os resultados apontam não haver evidências que o indicador do esforço tributário exerça influência positiva na condição financeira dos municípios. Em contrapartida, o indicador da autossuficiência financeira apresenta-se significativo e há evidências de que exerce influência positiva na condição financeira dos governos locais. Como contribuição, pretende-se auxiliar os gestores públicos tanto a prever situações que afetem a saúde financeira do município quanto fomentar ações preventivas que auxiliem a manter uma condição financeira adequada. Futuras pesquisas são recomendadas ao final do artigo. Palavras-chave: Teoria do Federalismo Fiscal. Condição financeira. Esforço Tributário. Autossuficiência financeira. CAPAG. Abstract: This research aimed to verify whether the Tax Effort Indicator and the Financial Self-Sufficiency indicator of Brazilian municipalities positively affect the latter's Financial Condition. The sample corresponds to locations with more than 300,000 inhabitants, which comes to 94 subnational entities. The sampling happened between 2018 and 2021. The research relies
This study empirically examines the roles of gubernatorial budgetary power and interest groups in vertical fiscal imbalances across US states via a two‐step generalized method of moments estimation during a 22‐year period (1987–2008). States' share of intergovernmental transfers and the local share of intergovernmental transfers are often affected by interaction between governors and interest groups, as are expenditure centralization and revenue/expenditure centralization. Revenue decentralization and the local share of intergovernmental transfers are frequently influenced by cooperation between governors and interest groups via mutual support. Long‐term cooperation and gridlock each influence expenditure centralization, revenue/expenditure centralization, and revenue decentralization. Long‐term cooperation is not statistically significant in terms of the state and local shares of intergovernmental transfers; that is, governors and interest groups cooperate in pursuit of short‐term benefits rather than long‐term results. Long‐term political influence also has no impact, affirming a short‐term‐oriented political viewpoint.
This article proposes an approach to the assessment of the financial condition of local governments by eliminating uncontrollable external environmental factors using cluster analysis. The author found seven clusters of provincial government, 13 clusters of regency government, and seven clusters of city government in Indonesia. The article provides evidence that clustering local government increases the effectiveness of analysis of financial conditions. The academic contribution of this article is generating cluster variables that are more comprehensive and relevant than those presented in previous studies. In addition, findings of this study can be used by authorities to develop local government financial management policies that are fairer.
Local governments facing extreme fiscal stress have few options. One that has historically been rare is filing for Chapter 9 bankruptcy. The limited number of cases has prevented systematic study of municipal bankruptcy. But given the results of bankruptcy for individuals, there are reasons to believe that bankruptcy can provide a financial fresh start for local governments. This research leverages six municipal bankruptcies in the years immediately following The Great Recession to explore the effects of bankruptcy on local government financial health. It employs a variety of empirical approaches to generate a counterfactual for the bankrupt governments and assess the effects of bankruptcy: synthetic control, propensity score matching, staggered difference‐in‐differences, and an event study. The results show that bankruptcy is associated with no declines and some meaningful improvements in financial health. These findings suggest that Chapter 9 bankruptcy may provide extremely stressed local governments with a potential path forward.
During and after the Great Recession, many local governments were compelled to declare fiscal emergencies, lay off workers, and cut services while others weathered the recession without needing to take such actions. In this paper, we construct a measure of fiscal distress using comprehensive annual financial reports, budgets, and media coverage and then use it as a dependent variable to model fiscal distress as a function of past financial performance and socio-economic environment. The empirical models show the relative importance of fiscal reserves, debt, and revenue composition in predicting local fiscal distress.
Berry et al.'s (1998) measures of U.S. state citizen and government ideology rely on unadjusted interest-group ratings for a state's members of Congress to infer information about (1) the ideological orientation of the electorates that selected them or (2) state legislators and the governor from the same state. Potential weaknesses in unadjusted interest-group ratings prompt the question: Are the Berry et al. measures flawed, and if so, can they be fixed by substituting alternative measures of a member's ideology? We conclude that a version of the Berry et al. state government ideology indicator relying on NOMINATE common space scores is marginally superior to the extant version. In contrast, we reaffirm the validity of the original state citizen ideology indicator and find that versions based on NOMINATE common space scores and adjusted ADA and COPE scores introduced by Groseclose, Levitt, and Snyder (1999) are weaker.
Welfare reform gave the U.S. states the opportunity to engage in second-order devolution (SOD), which allows local governments to exercise more discretion in the implementation of the Temporary Assistance for Needy Families (TANF) program. Proponents of welfare decentralization insist that local governments better understand the needs of the poor and are therefore able to implement TANF more effectively. Nevertheless, opponents argue that decentralization could lead to a “race to the bottom” and, thus, SOD might lead to more restrictive TANF implementation. We investigate these competing claims by examining how differences in decentralization affect (1) TANF caseload decline, (2) the use of sanctions, and (3) several work-related outcomes among recipients. Based on a series of state-level analyses, we find that SOD states experienced a greater degree of caseload decline than non-SOD states. In addition, SOD states were more likely to use punitive policy tools, such as TANF sanctions. However, we also find that SOD states display marginally better TANF performance, as reflected in higher rates of employment exits and earnings gains among TANF recipients. Thus, we find support for both sides of the decentralization debate.
The passage of Proposition 13 in 1978 was a watershed event that ushered in both a new era and a new fiscal regime for California’s local governments. We argue that, in the wake of follow-on initiatives, a protracted recessionary period, and the state’s use of newly authorized revenue-transfer powers, this still-evolving regime entered a new phase in the 1990s. This article analyzes the primary impacts of and responses to the changes in California’s post-Proposition 13 fiscal regime in the 1990s in five local jurisdictions. The results reveal that the most significant long-term impacts of this regime have been an altered fiscal structure and an unintended decrease in local home rule. These impacts, in turn, have led to cuts in non-essential services, the expansion of sales tax-generating redevelopment efforts, implementation of new taxes and user service fees, and increased reliance on one-time fiscal measures.
This study tests a measure of financial condition using government-wide information as required under the new financial reporting model set forth in GASB Statement No. 34. The measure consists of four financial condition dimensions in cash, budget, long-run and service-level solvencies, and 11 financial condition indicators. Results show that the measure is relatively reliable and valid and that government-wide information reported under the requirements of GASB Statement No. 34 provides a useful reporting framework to evaluate financial condition of a government. Additionally, financial condition among states varies greatly and there is much room for improvement.
In this project, I undertake this empirical study on the role of organizational slack among State-owned enterprises in China. I report empirical evidence based on a large data set (1995–1996) from the Chinese government archive, consisting of all Chinese large and medium SOEs. Results indicate that slack resources, regardless of the degree to which they have been committed in the production process, have contributed positively to firm performance. I also found that such an impact is curvilinear, resembling inverse parabolic curves. Research and practical implications are discussed.
First generation fiscal federalism (FGFF) studies the performance of decentralized systems under the assumption of benevolent social planners. Second generation fiscal federalism (SGFF) studies performance based on the fiscal and political incentives facing subnational officials. The paper focuses on three aspects of SGFF. First, it considers the design of intergovernmental transfers. While FGFF emphasizes correcting vertical and horizontal equity, SGFF emphasizes the importance of fiscal incentives for producing local economic prosperity. SGFF extends FGFF approaches by showing how non-linear transfer systems can produce both equalization and high marginal fiscal incentives to produce local economic growth. Second, the paper raises the fiscal incentive approach, showing how different tax systems produce different fiscal incentives for political officials to choose policies. Third, the paper discusses the interaction of democracy and fiscal federalism.
I present a new Stata program, xtscc, that estimates pooled ordinary least-squares/weighted least-squares regression and fixed-effects (within) regression models with Driscoll and Kraay (Review of Economics and Statistics 80: 549–560) standard errors. By running Monte Carlo simulations, I compare the finite-sample properties of the cross-sectional dependence-consistent Driscoll-Kraay estimator with the properties of other, more commonly used covariance matrix estimators that do not account for cross-sectional dependence. The results indicate that Driscol-Kraay standard errors are well calibrated when cross-sectional dependence is present. However, erroneously ignoring cross-sectional correlation in the estimation of panel models can lead to severely biased statistical results. I illustrate the xtscc program by considering an application from empirical finance. Thereby, I also propose a Hausman-type test for fixed effects that is robust to general forms of cross-sectional and temporal dependence. Copyright 2007 by StataCorp LP.
Municipal bankruptcy has historically been an extremely rare event. However, with the onset of the global financial crisis in 2007, many cities in the United States were under fiscal stress, coinciding with an uptick in the number of bankruptcies. This study leverages the proximity and similarity of three Chapter 9 filings in the State of California – the Cities of San Bernardino, Stockton, and Vallejo – to assess the relationship between fiscal stress and bankruptcy. In particular, it explores whether these three cities were explicitly under more fiscal stress than other, comparable cities in California. Using two models for fiscal health, the study finds that while the bankrupt cities were clearly under duress, the existing models of fiscal health did not indicate that the stress experienced by the bankrupt cities was demonstrably more extreme than the conditions faced by numerous other cities. The study concludes that models of fiscal health are unable to account for political or managerial choices that may be driving decisions to file for bankruptcy protection. In addition, the study suggests that the existing models do not account for certain factors that may drive the bankruptcy decision including issues relating to unfunded liabilities to pensions and other post-employment benefits.
The article deals with the phenomenon of the soft budget constraint (SBC). Though originally it was formulated to illuminate economic behavior in socialist economies, this concept is increasingly acknowledged to be pertinent well beyond their realm. The authors have two main objectives: conceptual clarification and survey of formal theoretical literature on SBC. In the first part of the article the accent is made on analyzing the essence of the SBC syndrome, means of its softening and corresponding expectations of organizations. Formal models of SBC in socialist and transition economies are also analyzed.
Public managers and organizations are often encouraged to take a proactive role in finding solutions to the challenges that face their communities. These challenges require meeting increasingly high expectations for public service provision with ever reducing resources. This research investigates the relationship between change in resource constraints—as measured by longer and shorter term financial condition—and the entrepreneurial orientation of US local governments. Theoretically, it remains unclear whether resource constraints foster or impede entrepreneurial actions (i.e., risk taking, proactivity, and innovation) in public organizations. While entrepreneurial actions may be related to increased organizational financial capacity, a decline in an organization's financial condition might motivate proactivity, innovation, and risk taking as problem‐solving mechanisms and a means to continue service provision. We explore this relationship using two sources of data: a 2012 national survey of managers in 500 cities and financial data from Comprehensive Annual Financial Reports. Our findings suggest that resource constraints are associated with increased entrepreneurial activity in US local governments.
Unified Republican Party control of the federal government after the 2016 election brought a reversal of several Obama administration policies, especially those adopted via executive and administrative action in areas such as immigration, energy, the environment, and LGBT rights. The 2016 election also prompted a reversal of partisan perspectives with respect to federal-state relations, as Republicans in Washington moved to preempt state discretion in various areas, whereas Democrats in state capitols challenged the legality of presidential actions and resisted federal efforts to constrain state and local discretion. In this essay, we discuss these themes through an analysis of developments in 2016 and early 2017 regarding health care, immigration, education, marijuana, and energy and environmental policy. We also consider key U.S. Supreme Court decisions affecting the contours of state policymaking.
While the passage of Statement No. 34 by the Governmental Accounting Standards Board (GASB, 1999) created a more robust financial reporting model, local officials continue to struggle with defining financial condition, interpreting it from annual financial statements, and communicating it in a systematic way. This review presents a framework for analyzing, interpreting, and communicating financial condition within the fund and government-wide reporting structure. It specifically responds to the void in the public administration literature for a manageable, yet comprehensive, approach to financial condition analysis. The goal is to help local officials conceptualize financial condition from the interpretation of resource flow and stock as presented in annual financial statements.
Allusions to the “problem of metropolitan government” are often made in characterizing the difficulties supposed to arise because a metropolitan region is a legal non-entity. From this point of view, the people of a metropolitan region have no general instrumentality of government available to deal directly with the range of problems which they share in common. Rather there is a multiplicity of federal and state governmental agencies, counties, cities, and special districts that govern within a metropolitan region.
This view assumes that the multiplicity of political units in a metropolitan area is essentially a pathological phenomenon. The diagnosis asserts that there are too many governments and not enough government. The symptoms are described as “duplication of functions” and “overlapping jurisdictions.” Autonomous units of government, acting in their own behalf, are considered incapable of resolving the diverse problems of the wider metropolitan community. The political topography of the metropolis is called a “crazy-quilt pattern” and its organization is said to be an “organized chaos.” The prescription is reorganization into larger units—to provide “a general metropolitan framework” for gathering up the various functions of government. A political system with a single dominant center for making decisions is viewed as the ideal model for the organization of metropolitan government. “Gargantua” is one name for it.
We examine the general factors that affect the distribution of debt among state and local governments. We measure the distribution as the percentage of total state and aggregate local debt that is issued or held by the state level of government. Using a fiscal federalism framework, we discuss the fiscal, legal, and political factors that play an important role in determining the level of government that issues debt. Findings suggest that important factors of debt concentration at the state level include state political ideology and economic factors of income per capita and unemployment rates.
State and Local Finances under Pressure explores the future of state and local government fiscal systems given the numerous pressures they face from economic, legal, technological, demographic and political forces. It explores how these multiple forces play out in terms of the changes state and local governments should and are likely to make.
Financial condition analysis is a critical task for public managers, but it is still unclear which indicators are the most salient measures of financial well-being. The financial health of Detroit, Michigan is unequivocally poor, providing an interesting case to evaluate the financial condition indicators that currently exist. We calculate the key financial indicators using data from Detroit over the last 11 years. We find the indicators fall into three groups: those that show no sign of impending financial crisis, those that show a steady worsening financial condition, and those that demonstrate a substantial change immediately prior to filing bankruptcy.
Understanding the financial condition of local governments is important for public managers and elected officials as they work to align revenues with p ublic demands for services, while maintaining financial solvency. This task becomes even more important when the economic and financial environment, over which local officials have little to no control, is collapsing around them. This article seeks to expand the literature of measuring financial condition of local governments by testing the validity and reliability of the Financial Condition Index (FCI). The FCI is a framework for evaluating financial condition that was initially developed by Groves, Godsey, and Shulman and later applied in US state-level studies by a number of scholars. The results from this article cast serious doubt on the applicability of using the FCI, and the four associated solvency dimensions, as an appropriate methodology for evaluating local government financial condition.
This study examines the effect of fiscal decentralization between states and their local governments on the financial condition of municipal governments. There are strong theoretical arguments on both sides of the federalism debate about the benefits for and against decentralization. Most of the research in this area investigates economic and social welfare consequences of fiscal decentralization. There is limited research, however, on the effects of fiscal decentralization on the financial health of local governments. Using data from the nation’s 150 largest cities, this study finds that intrastate fiscal decentralization results in weaker financial condition for municipalities in those states.
Now that state governments issue comprehensive annual financial reports in accordance with Statement No. 34 of the Governmental Accounting Standards Board, it is possible to generate a consistent and comprehensive set of government-wide financial information. We use the information to develop financial ratios to benchmark government financial performance from information beyond the traditional general fund, and test the hypothesis that such information is incorporated into the assessment of credit risk. We provide an empirical analysis of the incorporation of government-wide financial information into state government credit ratings, which provides a positive empirical test of the theory of certification and demonstrates how information from the government-wide financial statements is infused into financial markets.
This paper employs Comprehensive Annual Financial Reports of the 35 largest population American cities from 2005 to 2011 to examine how these cities managed the Great Recession, which was a global macroeconomic shock particularly damaging to the housing sector. While broader surveys of local government suggest that the Great Recession has been associated with substantive revenue declines, particularly via the property tax, the CAFR data indicates that large cities remained relatively stable in revenue by using higher property taxes to compensate for other revenue declines. Furthermore, these cities were able to rely on their net assets to engage in deficit spending. These findings indicate that cities are relying on traditional strengths of local governments, but are also able to engage in the deficit spending that is typically characteristic of national governments. It also seems to be the case that grants for capital projects were largely transferred into highly liquid and spendable assets.
This article examines the intergovernmental dimension of state fiscal stress. Using data from 1980-2005 and covering 47 U.S. states, the study answers two questions. First, does fiscal stress experienced at the state level reduce state governments’ expenditure responsibilities vis-à-vis the local public sector? Second, what functional responsibilities are implicitly devolved to local governments or centralized at the state level as a consequence of declining state fiscal condition? Three general frameworks are used to explain how the fiscal condition of states can affect state-local fiscal relations – fiscal federalism, the politics or interest group perspective, and the organizational model of fiscal slack.
The signature developments in intergovernmental relations and federalism in 2011–2012 were generally found at the state and
local levels. Strapped for funds to balance their budgets, states and local governments have made significant cutbacks, taken
legal risks, renegotiated labor union contracts, and rejected federal aid. Conversely, subnational governments have created
jobs and taken the lead in various policy areas. The U.S. Supreme Court showed strong support for state sovereignty claims,
which could perhaps encourage further the bottom-up activism by state and local governments. The president and his administration
made deft use of executive powers to influence public K–12 education reforms and energy and environmental policy, but much
of the year was spent in budget wrangling over how to reduce the mounting federal debt.
Allusions to the “problem of metropolitan government” are often made in characterizing the difficulties supposed to arise because a metropolitan region is a legal non-entity. From this point of view, the people of a metropolitan region have no general instrumentality of government available to deal directly with the range of problems which they share in common. Rather there is a multiplicity of federal and state governmental agencies, counties, cities, and special districts that govern within a metropolitan region.
This view assumes that the multiplicity of political units in a metropolitan area is essentially a pathological phenomenon. The diagnosis asserts that there are too many governments and not enough government. The symptoms are described as “duplication of functions” and “overlapping jurisdictions.” Autonomous units of government, acting in their own behalf, are considered incapable of resolving the diverse problems of the wider metropolitan community. The political topography of the metropolis is called a “crazy-quilt pattern” and its organization is said to be an “organized chaos.” The prescription is reorganization into larger units—to provide “a general metropolitan framework” for gathering up the various functions of government. A political system with a single dominant center for making decisions is viewed as the ideal model for the organization of metropolitan government. “Gargantua” is one name for it.
ABSTRACT Berry, Ringquist, Fording and Hanson’s [BRFH] (1998) measures of state citizen and government,ideology have been widely used ,in state politics research. The measures ,rely on unadjusted ADA and COPE ratings for a state’s members,of Congress to infer information about (i) the ideological orientation of the electorates that selected them, or (ii) state legislators and the governor from the same state. Some ,have argued that unadjusted interest-group ratings are an
The relationship between organizational slack and innovation has remained an unanswered empirical question for decades and theorists continue to argue over the basic issue of whether slack facilitates or inhibits innovation. Opponents of slack claim that slack relaxes incentives to innovate and encourages wasteful investment in R&D activities, while its proponents counter that slack resources allow individuals and departments to experiment with projects that might lead to important innovations. In this article, Nitin Nohria and Ranjay Gulati attempt to reconcile the theoretical debate by postulating that slack is neither inherently destructive to an organization, nor is it a fail-safe cure. By discouraging any form of experimentation whose success is uncertain, too little slack inhibits innovation. Similarly, an abundance of slack inhibits innovation by fostering complacency and lax controls. These two extremes suggest the notion that an intermediate level of slack is optimal for innovation in any organizational setting. Multivariate analyses of survey data from 264 functional departments of two multinational corporations support the authors' proposition that both too much and too little slack are detrimental for innovation. Thus, the authors argue that rather than focusing on whether slack has a uniformly positive or negative effect on innovation, theorists and managers should instead ask the question, ‘What is the optimal amount of slack?’
This article suggests that there is an inverse U-shaped relationship between slack and innovation in organizations: both too much and too little slack may be detrimental to innovation. Two related mechanisms governing this relationship are proposed: Slack fosters greater experimentation but also diminishing discipline over innovative projects, resulting in the hypothesized curvilinear relationship. Comprehensive worldwide data on 264 functional departments of two multinational corporations support the prediction.
In recent years a great deal of attention has been given to the subject of intergovernmental relations, but little has been done to document the changing role of the state vis-à-vis local government and the centralization of the state/local service and policy complex. It is impossible to analyze effectively the current condition of local government and the problems associated with it and at the same time neglect detailed consideration of the roles played by state and national agencies and programs. There has been considerable verbalization about the increasingly influential role of the national government in state and local affairs—verbalization that has presumably resulted from a massive increase in federal monetary support. Many have decried the loss of state and local autonomy that supposedly stems from this situation. This study is an attempt to develop a quantifiable measure of state centralization, analyze trends, look at the impact of intergovernmental payments upon the recipient levels, and compare results with our political folklore about state/local relationships.
One of the thorniest issues of intergovernmental fiscal relations is state oversight of local fiscal affairs. States have oversight responsibility and must take action when local governments run afoul of responsible fiscal behavior. Less accepted is how states can detect local financial difficulties before they become emergencies that require state takeover. Research in the 1970s provided some assistance to states wishing to recognize local financial emergencies. But the time has come to look at this issue anew, particularly with an eye toward predicting local financial problems before they become serious. This article describes a 10-point scale that predicts these problems and tests the scale to predict local fiscal stress in a sample of Michigan local governments.
Conventional wisdom suggests that aging of population will increase political pressure to tilt the composition of social spending in favor of the elderly, while potentially sacrificing other publicly provided goods such as education. This view seems to be supported by recent empirical findings that per child public education spending tends to be lower in US jurisdictions with higher fraction of elderly residents. Do these cross-sectional findings also carry the dynamic implication that longevity will lead over time to waning political support for funding of public education? This paper challenges such implication. We present a model that is consistent with the aforementioned cross-sectional regressions yet predicts an overall positive impact of increasing longevity on public education funding and economic growth.
The relationship between organizational slack and innovation has remained an unanswered empirical question for decades and theorists continue to argue over the basic issue of whether slack facilitates or inhibits innovation. Opponents of slack claim that slack relaxes incentives to innovate and encourages wasteful investment in R&D activities, while its proponents counter that slack resources allow individuals and departments to experiment with projects that might lead to important innovations. In this article, Nitin Nohria and Ranjay Gulati attempt to reconcile the theoretical debate by postulating that slack is neither inherently destructive to an organization, nor is it a fail-safe cure. By discouraging any form of experimentation whose success is uncertain, too little slack inhibits innovation. Similarly, an abundance of slack inhibits innovation by fostering complacency and lax controls. These two extremes suggest the notion that an intermediate level of slack is optimal for innovation in any organizational setting. Multivariate analyses of survey data from 264 functional departments of two multinational corporations support the authors' proposition that both too much and too little slack are detrimental for innovation. Thus, the authors argue that rather than focusing on whether slack has a uniformly positive or negative effect on innovation, theorists and managers should instead ask the question, ‘What is the optimal amount of slack?’
This paper provides new evidence that fiscal decentralization contributes to economic growth, in contrast to previous studies that have denied such a contribution. Our new state-level data for the United States enable us to estimate the effect of fiscal decentralization more objectively than previously, because the data set exhibits little cultural, historical, and institutional variation. We also provide the finding that the definition of fiscal decentralization is important in relation to the effect of fiscal decentralization on economic growth.
Both the federal government and the states use intergovernmental grants to try to change the composition of local spending across different programs, as well as the distribution of resources across localities. Many states are now under court order to use state education grants to reduce local disparities in education spending. While a substantial body of literature suggests that these court orders increase the level and progressivity of state education spending, there is little evidence on their broader effects on the total resources available not just for schools in low-income districts, but for other programs across all localities. We find that states finance the required increase in education spending in part by reducing their aid to localities for other programs, particularly for wealthier areas. Thus, while court-ordered school finance equalizations do increase total state aid to localities for education, they do so at the expense of drawing state intergovernmental aid away from programs like public welfare, health, hospitals, and general services. These findings provide insight into the effectiveness of using earmarked funds to achieve redistribution.
This paper discusses budgetary problems facing state governments, and explores the relationship between state government fiscal conditions and potential impacts on municipal governments and school districts. It examines how state budget cuts have affected the state funding of municipal governments and how these governments are likely to respond to reductions in state funding. The paper discusses the possibilities that the state government budget crisis will increase unfunded mandates imposed on local governments or result in an implicit shifting of costs from the state to local governments. A version of this paper was published in State and Local Government Review, vol. 36, no. 2, (Spring 2004): 86-102.
A cross-sectional analysis of 113 countries in 1968 indicates that population density has a significant and strong effect on total road density. An elasticity of 0.73 of road density with respect to population density was obtained. Time-series analysis confirmed this finding. An elasticity higher than unity was obtained for paved road construction. The effect on unpaved roads was somewhat smaller (0.6 elasticity) but still significant. These results suggest that population increases produce more available infrastructure/worker. The effects of both population density and per capita income on road construction are influenced by the stage of economic development. When the sample was divided into 3 income subsamples increased population density and per capita income were found to cause the substitution of paved for unpaved roads in the richer countries. At lower levels of income per capita income is less important than population density in influencing road construction since village volunteer labor can be substituted for money expenditures.