Hostname: page-component-8448b6f56d-tj2md Total loading time: 0 Render date: 2024-04-19T16:07:12.268Z Has data issue: false hasContentIssue false
  • English
  • Français

Regional competition, business politicians, and subnational fiscal policy

Published online by Cambridge University Press:  24 May 2018

Leonardo Baccini ,
Quan Li ,
Irina Mirkina  and
Kristina Johnson
Get access Rights & Permissions [Opens in a new window]

Abstract

What explains subnational policy choices over tax cut after decentralization? We test two different explanations in the context of the 2002 tax reform in Russia. A popular strand of literature suggests that decentralization induces more regional competition over investment, motivating subnational tax cuts. A second body of literature suggests that personal business interests of regional governors can account for their different policy choices. Governors with personal business ties refrain from tax cuts because they increase market competition. We find no support for the regional competition hypothesis, but strong statistical evidence for the business connection hypothesis. Our findings have important implications for research on fiscal decentralization and on the connections between business interests of leaders and their policy choices.

Keywords

fiscal policydecentralizationbusiness and politicsRussia
Type
Research Article
Information
Business and Politics , Volume 20 , Issue 3 , September 2018 , pp. 410 - 437
Copyright
Copyright © V.K. Aggarwal 2018 and published under exclusive license to Cambridge University Press 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Footnotes

We thank Interfax for letting us use private data from the SPARK Database, available at http://www.spark-interfax.ru/promo/. We thank the participants of the 2013 International Political Economy Society annual conference for helpful comments on a previous draft of the paper. Alisa Voznaya provided research assistance. All remaining errors are ours.

References

Baccini, Leonardo, Li, Quan, and Mirkina, Irina. 2014. “Corporate Tax Cuts and Foreign Direct Investment.” Journal of Policy Analysis and Management 33 (4): 977–1006.Google Scholar
Basinger, Scott J. and Hallerberg, Mark. 2004. “Remodeling the Competition for Capital: How Domestic Politics Erases the Race to the Bottom.” American Political Science Review 98 (02): 261–76.Google Scholar
Baturo, Alexander and Grey, Julia. 2009. “Flatliners: Ideology and rational learning in the adoption of the flat tax.” European Journal of Political Research 48 (1): 130–59.Google Scholar
Baturo, Alexander and Mikhaylov, Slava. 2016. “Blair disease? Business careers of the former democratic heads of state and government.” Public Choice 166: 335–54.Google Scholar
Beck, Nathaniel, Skrede Gleditsch, Kristian, and Beardsley, Kyle. 2006. “Space is More Than Geography: Using Spatial Econometrics in the Study of Political Economy.” International Studies Quarterly 50 (1): 27–44.Google Scholar
Besley, Timothy and Reynal-Querol, Marta. 2011. “Do democracies select more educated leaders?” American Political Science Review 105 (3): 552–66.Google Scholar
Besley, Timothy, Montalvo, Jose G., and Reynal-Querol, Marta. 2011. “Do Educated Leaders Matter?” Economic Journal 121(2): 205–27.Google Scholar
Brennan, Geoffrey and Buchanan, James M.. 1980. The Power to Tax: Analytical Foundations of a Fiscal Constitution, 1st edition. New York: Cambridge University Press.Google Scholar
Breton, Albert. 1991. “The Existence and Stability of Interjurisdictional Competition.” In Competition among States and Local Governments: Efficiency and Equity in American Federalism, edited by Kenyon, Daphne and Kincaid, John. Washington, D.C.: The Urban Institute, 37–56.Google Scholar
Cai, Hongbin and Treisman, Daniel. 2005. “Does Competition for Capital Discipline Governments? Decentralization, Globalization, and Public Policy.” American Economic Review 95: 817–30.Google Scholar
De Soto, Hernando. 1989. The Other Path: The Invisible Revolution in the Third World. New York: Harper and Row.Google Scholar
Dreher, Axel, Lamla, Michael J., Lein, Sarah M., and Somogyi, Frank. 2009. “The Impact of Political Leaders’ Profession and Education on Reforms.” Journal of Comparative Economics 37 (1): 169–93.Google Scholar
Easter, Gerald M. 2008. “Capacity, Consent and Tax Collection in Post-Communist States.” In Taxation and State-building in Developing Countries, edited by Brautigam, Deborah, Fjeldstad, Odd-Helge, and Moore, Mick. Cambridge, MA: Cambridge University Press, 64–88.Google Scholar
Elkins, Zachary, Guzman, Andrew T., and Simmons, Beth A.. 2006. “Competing for Capital: The Diffusion of Bilateral Investment Treaties, 1960–2000.” International Organization 60 (4): 811–46.Google Scholar
Faccio, Mara. 2006. “Politically Connected Firms.” American Economic Review 96 (1): 369–86.Google Scholar
Faccio, Mara, Masulis, Ronald W., and McConnell, John J.. 2006. “Political Connections and Corporate Bailouts.” Journal of Finance 61 (6): 2,597–635.Google Scholar
Fisman, Raymond. 2001. “Estimating the Value of Political Connections.” American Economic Review 91 (4): 1,095–102.Google Scholar
Franzese, Robert J and Hays, Jude C.. 2008. “Interdependence in Comparative Politics Substance, Theory, Empirics, Substance.” Comparative Political Studies 41 (4–5): 742–80.Google Scholar
Frye, Timothy M. and Iwasaki, Ichiro. 2011. “Government Directors and Business–State Relations in Russia.” European Journal of Political Economy 27 (4): 642–58.Google Scholar
Gehlbach, Scott, Sonin, Konstantin, and Zhuravskaya, Ekaterina. 2010. “Businessman Candidates.” American Journal of Political Science 54 (3): 718–36.Google Scholar
Gilardi, Fabrizio and Wasserfallen, Fabio. 2016. “How Socialization Attenuates Tax Competition.” British Journal of Political Science 46 (1): 45–65.Google Scholar
Goldman, Eitan, Rocholl, Jörg, and So, Jongil. 2009. “Do Politically Connected Boards Affect Firm Value?” Review of Financial Studies 22 (6): 2,331–60.Google Scholar
Hainmueller, Jens. 2012. “Entropy Balancing for Causal Effects: A Multivariate Reweighting Method to Produce Balanced Samples in Observational Studies.” Political Analysis 20 (1): 25–46.Google Scholar
Hayo, Bernd and Neumeier, Florian. 2014. “Political Leaders’ Socioeconomic Background and Fiscal Performance in Germany.” European Journal of Political Economy 34 (1): 184–205.Google Scholar
Hayo, Bernd and Voigt, Stefan. 2013. “Endogenous Constitutions: Politics and Politicians Matter, Economic Outcomes Don't.” Journal of Economic Behavior and Organization 88 (1): 47–61.Google Scholar
Hays, Jude C. 2003. “Globalization and Capital Taxation in Consensus and Majoritarian Democracies.” World Politics 56 (1): 79–113.Google Scholar
Horowitz, Michael C. and Stam, Allan C.. 2014. “How prior military experience influences the future militarized behavior of leaders.” International Organization 68 (3): 527–59.Google Scholar
James, Sebastian. 2013. “Tax and Non-tax Incentives and Investments: Evidence and Policy Implications.” Washington, D.C.: World Bank Group Investment Climate Department.Google Scholar
Jensen, Nathan M. and Lindstädt, Rene. 2012. “Leaning Right and Learning from the Left Diffusion of Corporate Tax Policy across Borders.” Comparative Political Studies 45 (3): 283–311.Google Scholar
Jensen, Nathan M., Malesky, Edmund J., Medina, Mariana, and Ozdemir, Ugur. 2014. “Pass the Bucks: Investment Incentives as Political Credit-Claiming Devices.” International Studies Quarterly 58 (3): 433–47.Google Scholar
Kenyon, Daphne A. 1997. “Theories of Interjurisdictional Competition.” New England Economic Review March/April: 13–28.Google Scholar
Khwaja, Asim Ijaz and Mian, Atif. 2005. “Do Lenders Favor Politically Connected Firms? Rent Provision in an Emerging Financial Market.” Quarterly Journal of Economics 120 (4): 1,371–411.Google Scholar
Konings, Jozef and Torfs, Wouter. 2011. “Fiscal Federalism, Tax Competition and Economic Agglomeration.” In Fiscal Federalism in the European Union: Proceedings of an EU Presidency seminar. Gent, Belgium: Larcier.Google Scholar
Krugman, Paul. 1991. “Increasing Returns and Economic Geography.” Journal of Political Economy 99 (3): 483–99.Google Scholar
LeSage, James. 2014. “What Regional Scientists Need To Know About Spatial Econometrics.” Review of Regional Studies 44 (1): 13–32.Google Scholar
Li, Quan. 2016. “Fiscal Decentralization and Tax Incentives in the Developing World.” Review of International Political Economy 23 (2): 232–60.Google Scholar
Mirkina, Irina. 2014. Aggregate Data, Regions of Russia (RoR), 1990–2010. ICPSR35355-v1. Ann Arbor, MI: Inter-university Consortium for Political and Social Research [distributor].Google Scholar
Neumayer, Eric and Plümper, Thomas. 2012. “Conditional Spatial Policy Dependence Theory and Model Specification.” Comparative Political Studies 45 (7): 819–49.Google Scholar
Neumeier, Florian. 2015. “Do Businessmen Make Good Governors?” Ifo Working Paper 230. Marburg, Germany: Philipps-Universität, Department of Economics.Google Scholar
Oates, Wallace E. 2001. “Fiscal Competition or Harmonization? Some Reflections.” National Tax Journal 54 (3): 507–12.Google Scholar
Oates, Wallace E. 2005. “Toward a Second-Generation Theory of Fiscal Federalism.” International Tax and Public Finance 12 (4): 349–73.Google Scholar
Plümper, Thomas, Troeger, Vera E., and Winner, Hannes. 2009. “Why is There No Race to the Bottom in Capital Taxation?” International Studies Quarterly 53 (3): 761–86.Google Scholar
Porter, Michael E. 1998. “Clusters and the New Economics of Competition.” Harvard Business Review 76 (6): 77–90.Google Scholar
Pregibon, Daryl. 1981. “Logistic Regression Diagnostics.” Annals of Statistics 9 (4): 705–24.Google Scholar
Qian, Yingyi and Roland, Gérard. 1998. “Federalism and the Soft Budget Constraint.” American Economic Review 88 (5): 1,143–62.Google Scholar
Qu, Xi and Lee, Lung-fei. 2015. “Estimating a Spatial Autoregressive Model with an Endogenous Spatial Weight Matrix.” Journal of Econometrics 184 (2): 209–32.Google Scholar
Rauscher, Michael. 1998. “Leviathan and Competition among Jurisdictions: The Case of Benefit Taxation.” Journal of Urban Economics 44 (1): 59–67.Google Scholar
Rodden, Jonathan. 2002. “The Dilemma of Fiscal Federalism: Grants and Fiscal Performance around the World.” American Journal of Political Science 46 (3): 670–87.Google Scholar
Rosstat (Federal State Statistics Service of Russia). 2012. Regions of Russia: Social and Economic Indicators [Data files].Google Scholar
Sharafutdinova, Gulnaz and Kisunko, Gregory. 2014. “Governors and Governing Institutions: A Comparative Study of State-Business Relations in Russia's Regions.” World Bank Policy Research Working Paper 7038. Washington, D.C.: World Bank Group.Google Scholar
Slinko, Irina, Yakovlev, Evgeny, and Zhuravskaya, Ekaterina. 2005. “Laws for Sale: Evidence from Russia.” American Law and Economics Review 7 (1): 284–318.Google Scholar
Stigler, George J. 1971. “The Theory of Economic Regulation.” The Bell Journal of Economics and Management Science 2 (1): 3–21.Google Scholar
Treisman, Daniel. 1998. “Fiscal Redistribution in a Fragile Federation: Moscow and the Regions in 1994.” British Journal of Political Science 28 (1): 185–222.Google Scholar
Treisman, Daniel. 1999. “Political Decentralization and Economic Reform: A Game-Theoretic Analysis.” American Journal of Political Science 43 (2): 488–517.Google Scholar
Treisman, Daniel. 2007. The Architecture of Government: Rethinking Political Decentralization. Cambridge, United Kingdom: Cambridge University Press.Google Scholar
Treisman, Daniel. 2009. “Decentralization and inflation: commitment, collective action, or continuity?” American Political Science Review 94 (4): 837–57.Google Scholar
Weingast, Barry R. 1995. “The Economic Role of Political Institutions: Market-Preserving Federalism and Economic Development.” Journal of Law, Economics, & Organization 11 (1): 1–31.Google Scholar
Weingast, Barry R. 2009. “Second Generation Fiscal Federalism: The Implications of Fiscal Incentives.” Journal of Urban Economics 65 (3): 279–93.Google Scholar
Weingast, Barry R. 2014. “Second Generation Fiscal Federalism: Political Aspects of Decentralization and Economic Development.” World Development 53: 14–25.Google Scholar
Wibbels, Erik. 2000. “Federalism and the Politics of Macroeconomic Policy and Performance.” American Journal of Political Science 44 (4): 687–702.Google Scholar
Wilson, John Douglas. 1991. “Tax Competition with Interregional Differences in Factor Endowments.” Regional Science and Urban Economics 21 (3): 423–51.Google Scholar
Wilson, John Douglas. 1999. “Theories of Tax Competition.” National Tax Journal 52: 269–304.Google Scholar
Yakovlev, Andrei A. 2011. “State-Business Relations in Russia in the 2000s: From the Capture Model to a Variety of Exchange Models?” BOFIT Discussion Papers 10/2011. Helsinki: Bank of Finland, Institute for Economies in Transition.Google Scholar
Zubarevich, Natalia. 2010. “State–Business Relations in Russia's Regions.” In The Politics of Sub-National Authoritarianism in Russia, edited by Gel'man, Vladimir, and Ross, Cameron. Farnham: Ashgate Publishing Ltd., 211–27.Google Scholar
Supplementary material: File

Baccini et al. supplementary material

Online Appendix

Download Baccini et al. supplementary material(File)
File 88.4 KB