Two essays on public economics: The consequences of fiscal decentralization on poverty and inequality, and The second best solution to the public expenditures' problem

This dissertation consists of two independent essays on public economics. The first essay studies the consequences of fiscal decentralization on poverty and income inequalities. We describe the possible channels through which fiscal decentralization might affect poverty and income inequalities, and provide a review of the available literature addressing different aspects of the problem. We also carry out an empirical analysis with data of a large number of countries at different stages of development, for the period 1971-2000; and conclude that fiscal decentralization has significant effects on poverty and income inequalities. In particular, fiscal decentralization helps to reduce poverty as long as the share of sub-national expenditures is not greater than one third of total government expenditures. Fiscal decentralization can also help to reduce income inequalities, but only if the general government represents a significant share of the economy (twenty percent or more). These findings are important because they suggest, contrary to the traditional public finance theory, that sub-national governments can play an important role in the reduction of poverty and income inequalities.;The second essay studies the second best solution to the public expenditures' problem. We revisit the problem of determining the optimal combination of public and private goods in the presence of a proportional labor income tax. By allowing the tax base to vary with the taxpayers' behavioral responses to taxation, we derive the "effective" budget constraint faced by a benevolent and omniscient government, which describes the set of affordable combinations of public and private goods. We show that the optimal solution to the government problem corresponds to the point of tangency between the effective budget constraint and the highest attainable social indifference curve. The traditional normative prescription for public expenditures under a second-best scenario does not satisfy this condition, and therefore it provides a suboptimal solution. We also show that under the proposed analytical framework we can predict the flypaper effect, an empirical regularity that has for long challenged the conventional theory.