The chapter extends the literature in monopoly government as an expenditure leviathan. He constructs and tests a political cost (vote losses) model of fiscal federalism by explicitly incorporating the policy maker’s choice of a structure of tax authority to expand the leviathan at the central and state levels. Given that the political cost of raising the same amount of revenue is lower at the central level but the political gain of spending this revenue is higher at the state level, state leviathans collude with the center for revenue centralization and sharing. Using income and public finance data for 17 major Indian states for the period 1975-97, He estimates both fixed effects and random effects models and tests three hypotheses. His results support the validity of the model. One of the important corollaries of the model is that the concept of expenditure stimulation of grants is less attractive. What emerges is the sub central expenditure stimulation of central budgets as retaliatory response. He concludes that decentralization of revenue bases and tax earmarking should be a key feature of the reform agenda of fiscal federalism in India.
Shyam Nath, “A political cost model of fiscal federalism : some empirical results from Indian federation”, Development and Public Finance: Essays in Honour of Raja J. Chelliah, eds by D.K. Srivastava, U. Sankar, pp. 98-112, 2012.