Fiscal Incentives and Shared Revenue Sources with Differentiated Sharing Rates

Abstract

A closer look at the estimating procedures that have been used to examine the empirical evidence of weak fiscal incentives at the local level in Russia in 1990s shows serious flaws in the treatment of proceeds from shared revenue sources with differentiated sharing rates widely employed in the intergovernmental fiscal relations in Russia at that time. This work analyzes two approaches suggested earlier to deal with proceeds from these sources when estimating fiscal incentives, and it develops an alternative method. Empirical results from this alternative approach suggest that the lack of fiscal incentives in Russia in mid-1990s was not as overwhelming as it appears from the estimates reported in the earlier works, which implies that the regional intergovernmental fiscal relations policies might have not been the likely cause of poor performance of the government and the economy in Russia at that time.