Fiscal Games and Public Employment: A Theory with Evidence from Russia

Abstract

Why do some governments—both in different countries and in regions within those countries—employ more workers than others? Existing theories focus on the level of economic development, political redistribution, and social insurance. But they raise additional puzzles and do not account for all evidence or for a global trend toward decentralization of public employment. The authors propose a new theory, inspired by Russia's recent experience, that locates one motive for subnational public employment growth in a political and fiscal game between central and subnational governments. In countries with weak legal systems, local and regional officials may deliberately set their employment levels beyond their fiscal capacity, prompting bailouts from the central government, which fears the political cost to it if wage arrears accumulate and provoke strikes. The authors model the logic of such brinkmanship, derive several propositions, and show that they—and the model's assumptions—fit empirical evidence from Russia in the 1990s. Deficiencies of that country's overstaffed, underequipped, irregularly paid, ineffective, and strikeprone public sector appear to result in part from a system of dysfunctional incentives created by the interaction of electoral pressures with the system of fiscal federalism. The authors suggest parallels with Latin American countries such as Argentina and Brazil.

Determinants of Expenditure Decentralization: Evidence from China

“…As observers have long suspected that local governments play fiscal games with national governments in order to gain more grants in some countries (Gimpelson & Treisman, 2002), the results of our analysis also suggest a predatory role played by local governments in China. In addition, our study provides suggestive evidence that both population density and foreign direct investment (FDI) have negative influences over expenditure decentralization while economic development adds almost nothing to the explanatory power of our models for expenditure decentralization.…”

“…Employing the data of Russia, Gimpelson and Treisman (2002) document fiscal games played by the national and sub-national governments wherein public employment and political patronage are key to understanding the distorted intergovernmental transfer system in Russia. On the one hand, local governments increased public employment beyond their own fiscal capacity for the purpose of asking for more central transfers.…”

To Remain a Teacher? Factors Influencing Attitudes to Leaving the Teaching Profession

“…The situation was discussed by the teachers themselves, researchers and the public at large primarily in economic terms [Gimpelson, Treisman 2002]. At that moment, a severe cut in the state funding of education led to a drop in teacher salaries to the point where many teachers were forced to leave for better paid skilled and unskilled occupations.…”

A political economy theory of the soft budget constraint

“…Much case study evidence supports this result. The regressions in Gimpelson and Treisman (2002) shows that (p. 149) "Public employment tended to fall after the election of a new governor, who presumably trimmed the patronage appointments of his predecessor. "With the change of political power in Ghana in 1966 Killick (1978, p. 238) notes that the new government decided "to lay o¤ nearly 40,000 redundant workers in various state agencies".…”