ABSTRACT
For Germans, the themes discussed by the authors contributing to this section appear all too familiar. In particular, Sempere and Sobarzo’s treatment of the moral hazard problem associated with fiscal federalism addresses issues that can be directly related to respective analyses for Germany. This applies to the description of the institutional structure, the empirical constellation, as well as recent theoretical and econometric contributions. However, in order to assess the fundamental problem structure, it appears useful to begin by briefly recalling the underlying principles of fiscal federalism. Decentralized government spending can serve to improve allocative efficiency by accounting for regionally divergent preference structures concerning the provision of public goods and introducing competition between regional authorities. Both arguments imply that public goods which are almost exclusively consumed by the citizenship of a single federal entity should also be supplied by the respective regional authority. Efficiency then also clearly requires that marginal utility of the territory’s citizenship derived from the public goods must determine its contribution to the budget which will be distributed. In fact, the latter only restates the former, given that the different territorial authorities possess only limited financing means by themselves.
