State Fiscal Institutions: An Evolution

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2007-08-03

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This dissertation considers two aspects of the study of fiscal institutions: the importance of understanding their evolution and the need for analyzing their specific form. Chapter 1 addresses the tension between commitment and flexibility in the design of institutions and stresses the importance of using a comprehensive approach when studying them.

Chapter 2 explores the history of constitutional debt restrictions, using a new dataset that allows us to follow their evolution and construct a proper classification. In this chapter, we find that the importance of limits on debt has been overstated. Procedures regulating debt issuance are the most important aspect of the provisions. In addition, modification procedures and debt itemization play an important role in the actual limiting of debt at the state level. Second, the analysis shows a long process of "recursive institutional change," culminating in a move towards greater flexibility in the 1960s and 1970s. This new perspective provides a framework for understanding the appearance of new agents in debt issuance, the rise of many different forms of financing, and the creation of tools and fiscal institutions that today are basic elements in the budgeting practices of the states.

Chapter 3 investigates the determinants of the configuration of one of the latest of such institutions. Using multinomial discrete techniques and introducing the ordered nature of the requirements in the analysis, this chapter investigates the reasons that have led to the adoption of weak or more stringent budget stabilization funds (BSFs). We find that economic factors (such as tax effort, volatility of spending and tax revenue) and political factors (like the size of the senate and the fractionalization of the lower house) have had a significant impact on the way states have chosen to configure their BSFs (or "rainy day funds" as they are often called). Nevertheless, the specific form of these funds cannot be properly explained if we ignore the set of other institutions that exist in the states. We find that balanced budget requirements, the scope of tax and expenditure limitations, and the appointment method of the state's supreme court influence the design of BSFs.

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