Hamilton’s Paradox

Jonathan Rodden is the Ford Career Development Associate Professor of Political Science at MIT, and was recently a visiting scholar at the Center for Basic Research in the Social Sciences at Harvard University. He received his Ph.D. in political science from Yale University, his B.A. from the University of Michigan, and was a Fulbright Fellow at the University of Leipzig. In collaboration with the World Bank, he recently co-edited a book entitled Fiscal Decentralization and the Challenge of Hard Budget Constraints (MIT Press 2003). His articles have appeared in journals including The American Journal of Political Science, The British Journal of Political Science, Comparative Politics, International Organization, The Virginia Law Review, and World Politics.

As new federations take shape and old ones are revived around the world, a difficult challenge is to create incentives for fiscal discipline. A key question is whether a politically-motivated central government can credibly commit not to bail out subnational governments in times of crisis if it funds most of their expenditures. The center can commit when subnational governments retain significant tax autonomy, as in the United States. Or if the center dominates taxation, it can tightly regulate borrowing, as in many unitary systems. In a third group of countries including Brazil and Germany, the center can neither commit to a system of market-based discipline nor gain a monopoly over borrowing. By combining theory, quantitative analysis, and historical and contemporary case studies, this book explains why different countries have had dramatically different experiences with subnational fiscal discipline.

1. Introduction and overview; 2. Promise and peril: intellectual history; 3. Sovereignty and commitment; 4. The power of the purse: intergovernmental grants and fiscal discipline; 5. Disease or cure? Political parties and fiscal discipline; 6. An approach to comparative case studies; 7. Fiscal federalism and bailouts in postwar Germany; 8. The crisis of fiscal federalism in Brazil; 9. The challenge of reform in federations; 10. The origins of subnational sovereignty; 11. Conclusions.