TROY UNIVERSITY SORRELL COLLEGE OF BUSINESS

Class - Public Choice, ECO 6660-TGAA

Instructor Dr. George R. Crowley
Student Zviad Barkaia
Email- zbarkaia@troy.edu
A Pure Theory of Local Expenditures Myths and Realities
Abstract
In this paper, I have argued that local government has knowledge of provision
of goods only in the countries where there exists socio-political tradition of
strong local government. Without this tradition, it is less expected for a pure
.
theory of local expenditures to be plausible.

2015
Introduction

Zviad Barkaia

The most controversial theory in public choice was written by Charles

M. Tiebout. In his paper, A Pure Theory of Local Expenditures, Tiebout tries
to criticize Samuelsons and Musgraves assumption that expenditure is
handled at the central government level.1 He tried to create a model that
explains how local government controls expenditure for public good, which is
much more appropriate because of existance of knowledge on the local level.
It is worth to acknowledge, that existence of knowledge is Hayekians
knowledge of the particular circumstances of time and place. I agree with
Tiebout who assumes that presumably local government has time and place
knowledge than federal government, and use of this knowledge provides
appropriate amount of goods (Expenditures) and adequate amount of price
for those goods (Taxes). However, it is important to understand how people
(or in our case institution) acquire knowledge. The sufficient way to get
knowledge is practice. As Hayek explains we need to remember how much
we have to learn in any occupation after we have completed our theoretical
training, how big a part of our working life we spend learning particular jobs
local conditions, and of special circumstances. 2 Local government is in
the same condition. Therefore, I argue that unlike the North American and
Nordic (Scandinavian) countries that have socio-political tradition of strong

1 Tiebout C. M. (Oct. 1956) A Pure Theory of Local Expenditures The Journal of Political
Economy, Vol. 64, No. 5, (Oct., 1956), pp. 416-424. The University of Chicago Press

2 Hayek, Friedrich A. (1945) "The Use of Knowledge in Society", American Economic

Review. XXXV, No. 4. pp. 519-30. American Economic Association
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Zviad Barkaia

local government, in the countries where municipalities as decision maker

formal institutions are very weak, Tiebouts model does not apply.
Top-Down & Bottom-Up
Historically,

central

government

and

nation

state

follows

local

government and local centers of political power. Local tribes, clans, feudal
benefices were controlled not by central governors but by local leaders. As
an example, we can concentrate on the history of political evolution of
Europe and North America. For example in the Nordic countries, where the
Danish King had only ceremonial power on Denmark, Norway, and Sweden,
local rulers reinforced and adopted most function of state because of the
absence of central power. Even now, despite the fact that the central
governments in the Scandinavian countries have wide regulatory and
functional abilities, local government still is presented as a strong part of
political decision-making process.3 The power of local governments clearly
appears in Switzerland, where cantons presently have a huge political and
economical power. They are local planners, and they perform essential
political tasks: social welfare, local defense, local taxation, etc. 4

3 Shahs A. (2006) Local Governance in Developing Countries; Washington D.C. The

World Bank.
4 Political System and Government Switzerland's Constitution and Federalism http://swissgovernment-politics.all-about-switzerland.info/index.html

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Zviad Barkaia

The North American model is characterized as a bottom-up system.

Before civil war, local civil republics were decision makers and had a wide
political and economical power over its states. Federal government
established local government as a formal institution but it was based on local
political circumstance.
However, in Germany policy maker is federal government while local
government is responsible only for delivery of goods to the local level. There
are five independent political levels from top to bottom: The level of
the European Union; the Federal Republic of Germany; The level of
the Lnder; The level of the districts and the level of the towns and
municipalities.5 Unlike the North American and the Nordic countries,
political system of Germany is characterized as Top-Down model.

Figure 1: Public expenditure of Government in Germany

EU

3%
37%

Federal Government
34%

Local Governments
Lnder

26%

Figure # 1 Source: Federal Ministry of Finance (1996: 328).

5Local Government Administration in Germany http://www.iuscomp.org/gla/literature/localgov.htm

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Zviad Barkaia

Figure #1 shows that the local expenditure of Lnder (States in

Germany) (36.6%) exceeds to federal governments spending (34.10).
Intuitively we will assume that Lnders has more power than federal
government. However, from the figure #2 we can find out that the biggest
source of revenue is shared taxes.

Figure 2: Sources of Revenue in Lnder

Exclusive Taxes
13% 9%

Specific-Purpose Grants
9%

General-Purpose Grants

6%

Shared taxes

63%

Other Revenue

Figure # 2 Source: Federal Ministry of Finance (1996: 328).

As you can see from the figure #2, only 9% of revenue comes from
exclusive taxes. Therefore, we can easily assume that local level is largely
depentens on higher-level government.
The Chinese model is further away from decentralization. Chinese
provincial and local government practically are integrated with central one;
the most popular phrase in the description of the local administrative system
of china is directly under the Central Government; The provinces and
autonomous regions are direct parts of central government.6

6 The Local Administrative System http://www.china.org.cn/english/Political/28842.htm

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Zviad Barkaia

Therefore, we can assume that, in spite of the country is developing or

developed if it does not have socio-political tradition of strong local
government, it is highly possible that in this country we will find a very weak
and dependent lower level government.

New Application
To test theoretically Tiebouts pure theory of local expenditures, I am
trying to apply this model to the Soviet Union. (Of course my goal is not fully
explain the political circumstance in Post-Soviet countries. This paper will be
not sufficient for this aim. I am just trying to substitute Tiboutes model to
the different circumstance and show how hard is to generalize it.) Let us
assume that the Post-Soviet countries are local governments (In the Soviet
era Post-Soviet national governments were assumed as a local government.)
and assume that they are agents that should provide goods and prices for
those goods. If we apply the theory of local expenditure on this area
according to Tiebout we should assume that all countries have time and
place knowledge (as Tiebout assumed about local governments) and all
countries are more or less able to provide public goods.
However, after collapse of the Soviet Union reality was different.
Because of centralized political system during of USSR, like in Germany or
China

and

because

of

nonexistence

of

practical

knowledge,

local

governments were motionless. After the collapse of the Soviet Union, new
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Zviad Barkaia

Post-Soviet nations have had a number of unsolved problems because of

scarcity of knowledge. Especially in small Post-Soviet countries like Armenia,
Azerbaijan, Belarus, Georgia, etc. It was practically impossible to create a
system of tax collection and government spending.

Conclusion
In this paper I have argued that local government has knowledge of provision
of goods only in the countries where exists socio-political tradition of strong
local government. Without this tradition, it is less expected for a pure theory
of local expenditures to be plausible.
On the example of the Soviet Union, we can see that after collapse of central
government local states could not rearrange a political system for a long
time.

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Zviad Barkaia

Bibliography:
Hayek, Friedrich A. (1945) "The Use of Knowledge in Society", American
Economic Review. XXXV, No. 4. pp. 519-30. American Economic Association;
Local Government Administration in Germany http://www.iuscomp.org/gla/literature/localgov.htm
Political System and Government Switzerland's Constitution and Federalism
http://swiss-government-politics.all-about-switzerland.info/index.html
Shahs A. (2006) Local Governance in Developing Countries; Washington D.C.
The World Bank.
The Local Administrative System
http://www.china.org.cn/english/Political/28842.htm
Tiebout C. M. (Oct. 1956) A Pure Theory of Local Expenditures The Journal of
Political Economy, Vol. 64, No. 5, (Oct., 1956), pp. 416-424. The University of
Chicago Press

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