Decentralizing Central Targets:Decentralizing Central Targets:Empirical Evidence from ItalyEmpirical Evidence from Italy

M. A. AntonelliM. A. Antonelli

Università “La Sapienza”- Roma Università “La Sapienza”- Roma

V. GrembiV. Grembi

Università Cattolica - MilanoUniversità Cattolica - Milano

Paper AimsPaper Aims

• Targeting local services (quality or quantity)

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Crèmer e Palfrey (2000 e 2002)

Basic expenditure decision model in two settings unitary settingdecentralized setting

In both settings the policy maker has to decide how to

split budget among a bunch of good;

Check with Italian unbalanced panel (2002-2007) with

data at the municipal level on public childcare

OutlinesOutlines

The modelThe modelunitary setting (1)unitary setting (1)

• Government: 1 level Government: 1 level • Two services Two services xx andand yy • Quality is given. Quality is given. • The pThe policy maker maximize an utility function which olicy maker maximize an utility function which

is additive respect to the expenditure compis additive respect to the expenditure components (x onents (x and y) subject to a budget constraintand y) subject to a budget constraint

• Each component is weighed by a parameterEach component is weighed by a parameter (θ) which (θ) which stands forstands for political visibility one service political visibility one service

Unitary setting (2)Unitary setting (2)

• Maximization problem:Maximization problem:

• θ is the weigh which is associated to each θ is the weigh which is associated to each service from the politician perspeservice from the politician perspectivective;;

• T T = total revenues= total revenues;;• andand represent expenditure level (funded by T)represent expenditure level (funded by T)

maxx

T,y

T

UL ln xT (1 ) ln yT

T xT yT

xT

yT

0;1

Unitary setting (3)Unitary setting (3)

Solutions for the expenditure levelSolutions for the expenditure level

andand

Funds are allocated according toFunds are allocated according to θ θ

xT T

yT (1 )T

Decentralized Setting Decentralized Setting

• Government: two levelsGovernment: two levels• Local government is in charge for the allocation of 2 Local government is in charge for the allocation of 2

services (services (x x andand y y).).• The governThe government set and expenditure target ment set and expenditure target

(quantitative terms) on x in order to assure a (quantitative terms) on x in order to assure a minimum level of the serviceminimum level of the service

Decentralized SettingDecentralized Setting

Capital expenditures for theCapital expenditures for the supply expenditure are supply expenditure are funded by the central levelfunded by the central level;;

The local level is in charge for the current The local level is in charge for the current expenditureexpenditure a supply expansion means and induced a supply expansion means and induced local expenditurelocal expenditure;;

The local level gets a central grant for its service The local level gets a central grant for its service management expenditures (based on several given management expenditures (based on several given parameters)parameters)

Decentralized targetDecentralized target

• The current expenditures for x canThe current expenditures for x can be covered be covered:: (local funding)(local funding) (central funding)(central funding)

• The target can be The target can be partially funded by with partially funded by with which represents target implementation due to the which represents target implementation due to the central grantcentral grant

• represents the institutional characteristics which represents the institutional characteristics which rules the intergovernmental relationships among rules the intergovernmental relationships among levels (impact on the politician decision to match the levels (impact on the politician decision to match the target)target)

xT

x B

x B

0;1

Maximization ProblemMaximization Problem

OneOne--perioperiodd model (myopthic politician) model (myopthic politician) XXE E and Yand YEE are the total expenditure of the local are the total expenditure of the local

government for running local services x and ygovernment for running local services x and yCurrent expenditure for x are given byCurrent expenditure for x are given by

subject to: T+B= subject to: T+B= XXE E +Y+YEE

XE

XE xT x B

maxXE ,YE

U ln(XE xT ) (1 ) ln(YE yE )

Maximization problemMaximization problem

andand are the local expenditure levels set in are the local expenditure levels set in the unitary the unitary settingsetting;;

The maximization is on the expenditure The maximization is on the expenditure variations characterizing the decentralized variations characterizing the decentralized setting compared to the unitary settingsetting compared to the unitary setting

The expenditure levels areThe expenditure levels are

xT

yT

XE

* xT (T B xT yT )

xT

* xT (T B xT yT ) x B

YE

* yT (1 )(T B xT yT )

Statica comparataStatica comparata

Value of parameters

Sign of the lo cal funding expenditure

( *Tx )

Sign of the induced expenditure

( Bx )

Sign of the total expenditure

( EX )

=0 *Tx <0 Bx >0 EX =0 the t otal current expenditure is invariant.

The spending policy is characterized by a reallocation of resources from the local funding expenditure to the induced expenditure (claim 2)

<1 *Tx <0 Bx >0 EX >0 the total current expenditure increases. The

induced expenditure increases while the local funding expenditure decreases. The spending policy is characterized by a reallocation of resources from the local funding expenditure to the induced expenditure (claim 2)

1<

<dB

xd B

*Tx <0 Bx >0 EX >0 the total current expenditure increases. The

induced expenditure increases while the local funding expenditure decreases. The spending policy is characterized by a reallocation of resources from the local funding expenditure to the induced expenditure (claim 3)

>1 *Tx >0 Bx >0 TX >0 the t otal current expenditure increases.

Both expenditure components increase

= *Tx >0 Bx =0 TX >0 the total current expenditure increases but

the induced expenditure’s component is equal to zero. Therefore, the entire central grant is used to increase the lo cal funding expenditure. (This case occurs when 0 ).

Empirical PartEmpirical Part

• A supply expansion policy on a targeted service within a multilevel institutional framework depends both on local preferences (political visibility of the service) and on the institutional framework

• Attempt to assess how the local decisions on local service supply react to these elements

• A unique attempt to implement minimum level in Italy: childcare 2010 Lisbon target

Italian institutional frameworkItalian institutional frameworkFinanziamenti Livelli di Governo Funzioni

Stanziamenti "una tantum" per l'estensione dell'offerta

Stato Definizione dei LEP

Stanziamenti regionali per l'estensione dell'offerta e la gestione del servizio

RegioniFunzione di

programmazione

Ripartizione delle risorse regionali tra gli enti di livello inferiore

Province (o ambiti territoriali)

Formazione degli educatori e/o funzioni di

programmazione

Copertura dei costi di gestione del servizio con compartecipazione al costo da parte degli utenti

Comuni (o unioni)

Gestione del servizio

Italian Case StudyItalian Case Study

• Political visibility or local preferences Del Boca et al. 2005. Cultural differences in the

demand for the service (e.g. Southern/Northern European States)

Central role of the family in providing social services and financial support to its members

The value families attach to the care of young children

DatasetDataset

• Unbalanced Panel 2002-2007 (max 761/4307)• Delta

1. Fund allocation criteria from the regional to the municipal level (FPS)

2. Municipal fiscal dependency from transfers3. Political alignment (three-level setting)

1. Tetha1. Applications per 0-3 resident population2. Number of private crèches enrolled to the official

register run by the board of trade of Milan

Variable Mean Std. Dev. Min Max Observationsoverall 0.3982185 0.2137348 0 1.809136 N = 4106between 0.2049032 0 1.453383 n = 752within 0.0603732 -0.0309781 1.199933 T-bar = 5.46011overall 16932.34 2377.961 1009.91 29328.27 N = 4307between 2308.984 10827.93 28555.39 n = 760within 587.2186 15003.96 19101.91 T-bar = 5.66711overall 42615.98 127341.9 5728 2705603 N = 4313between 124088.2 5783.167 2599265 n = 761within 3159.873 -15819.69 148954.3 T-bar = 5.66754overall 5857.68 2734.113 0 32892.7 N = 3993between 2377.356 0 17119.61 n = 746within 1466.179 -5648.23 21630.77 T-bar = 5.35255overall 0.1842086 0.0954965 0 0.7574627 N = 4132between 0.0882432 0.0119535 0.5092208 n = 750within 0.0366175 -0.0753152 0.5193665 T-bar = 5.50933overall 1.296082 3.599787 0 93 N = 4313between 3.183823 0 59.83333 n = 761within 1.524284 -37.53725 34.46275 T-bar = 5.66754overall 0.2813893 0.4497298 0 1 N = 4261between 0.2506658 0 1 n = 752

within 0.3767136 -0.551944 1.114723 T-bar = 5.66622overall 0.1451055 0.1179611 0.0001546 0.7106667 N = 4307between 0.1062067 0.0159503 0.6028141 n = 761within 0.0530009 -0.0786889 0.4529872 T-bar = 5.65966overall 0.3992581 0.4898027 0 1 N= 4313between 0.4903805 0 1 n=761within 0 0.3992581 0.3992581 T-bar=5.66754overall 0.2733596 0.4457356 0 1 N= 4313between 0.4466255 0 1 n=761within 0 0.2733596 0.2733596 T-bar=5.66754

Grants Dependancy

Funding based on Usage

Funding complexity

Applications per 0_3 population

Registered Private creches

Three-level alignment

Achievement Rate

Average taxable income

Resident Population

Average Cost per Seat

Achievement Rate=Achievement Rate=(Available Seats/Target (Available Seats/Target Centrale)Centrale)

2002 2003 2004 2005 2006 2007 TotalMean .39620376 .39561718 .39882168 .39530333 .39404992 .40778962 .39791884

Stand. Dev. .15231492 .15033205 .15893178 .15345233 .16565613 .17154992 .15866675Obs. 197 203 216 214 213 202 1245

Mean .49555879 .49857451 .50085647 .49297216 .51342338 .53793136 .50659776Stand. Dev. .23612794 .24680077 .24456085 .24898032 .24753568 .26520607 .24830036

Obs. 153 154 162 172 169 161 971Mean .38478304 .39753689 .41332939 .41775051 .42000364 .43169633 .41100813

Stand. Dev. .18861984 .1901949 .2188803 .21745836 .20868151 .22036653 .20795137Obs. 168 168 171 169 175 172 1023

Mean .25559505 .26091358 .26221061 .26375493 .26864421 .26189948 .2621782Stand. Dev. .17263256 .16000883 .16301466 .17387664 .17516999 .16842087 .16851486

Obs. 144 142 150 150 143 138 867Mean .38568259 .39119444 .39670264 .39652369 .40373992 .4151179 .39821851

Stand. Dev. .20408542 .20405847 .21305176 .2144823 .21647313 .22849486 .2137348Obs. 662 667 699 705 700 673 4106

YearsMacroArea

South and the Islands

Total

North West

North East

Center

MethodologyMethodology

• FE/RE • Endogeneity problem local preferences

Hard to talk of a supply induced demand…

• Instrumental Variable approach• Hausman Taylor estimator

• HT is as IV estimator which relies for endogenous time invariant covariates on the mean of the exogenous time-varying covariates and for the endogenous time-varying their own averages

yit i xit' it

yit x1it' 1 x2it

' 2 w1i' 1 w2i

' 2 i it

VARIABLES FE_1 RE_1 FE_2 RE_2 FE_3 RE_3 FE_4 RE_4 FE_5 RE_5 FE_6 RE_60.00** 0.00*** 0.00** 0.00*** 0.00** 0.00***(3.24) (7.84) (3.24) (4.15) (3.24) (4.38)-0.00 -0.00 -0.00 -0.00 -0.00 -0.00 -0.00 0.00 -0.00 -0.00 -0.00 0.00(-0.98) (-1.33) (-0.93) (-0.36) (-0.98) (-0.52) (-0.93) (0.05) (-0.98) (-0.04) (-0.93) (0.54)-0.00*** -0.00*** -0.00*** -0.00*** -0.00*** -0.00*** -0.00*** -0.00*** -0.00*** -0.00*** -0.00*** -0.00***(-14.23) (-12.21) (-14.32) (-11.73) (-14.23) (-12.72) (-14.32) (-12.63) (-14.23) (-13.78) (-14.32) (-13.70)0.66*** 1.01*** 0.66*** 1.03*** 0.66*** 0.98*** 0.66*** 0.99*** 0.66*** 0.91*** 0.66*** 0.92***(26.03) (42.66) (25.87) (43.63) (26.03) (41.26) (25.87) (41.37) (26.03) (37.91) (25.87) (38.06)0.00*** 0.00** 0.00*** 0.00*** 0.00*** 0.00** 0.00*** 0.00*** 0.00*** 0.00** 0.00*** 0.00***(3.33) (2.93) (3.65) (3.94) (3.33) (3.28) (3.65) (3.87) (3.33) (3.12) (3.65) (3.75)0.01*** 0.01* 0.01** 0.00 0.01*** 0.01* 0.01** 0.00 0.01*** 0.01* 0.01** 0.01*(3.59) (2.04) (3.09) (1.36) (3.59) (1.99) (3.09) (1.54) (3.59) (2.45) (3.09) (1.99)

usage 0.00 0.07*** 0.00 0.07*** 0.00 0.09*** 0.00 0.10***(.) (8.64) (.) (8.39) (.) (6.14) (.) (6.23)

funding_complexity 0.00 0.04*** 0.00 0.04*** 0.00 0.07*** 0.00 0.07***

(.) (5.18) (.) (4.19) (.) (6.90) (.) (6.90)grants_dependency_2 0.03 -0.04* 0.03 0.02 0.03 0.02

(1.54) (-2.20) (1.54) (1.06) (1.54) (0.98)Macro Area Effect No No No No Yes Yes Yes Yes No No No No

Regional Effects No No No No No No No No Yes Yes Yes YesConstant 0.25*** 0.05* 0.34*** 0.21*** 0.25*** 0.16*** 0.34*** 0.26*** 0.25*** 0.33*** 0.34*** 0.20***

(7.83) (2.11) (20.99) (25.62) (7.83) (6.23) (20.99) (27.75) (7.83) (3.35) (20.99) (3.54)Observations 3850 3850 3850 3850 3850 3850 3850 3850 3850 3850 3850 3850

R-squared within 0.248 0.238 0.246 0.233 0.248 0.239 0.246 0.237 0.248 0.243 0.246 0.241Wald Test 2587.84 2490.83 2714.42 2689.89 3031.72 2998.98sigma_u 0.157 0.0888 0.160 0.0890 0.157 0.0883 0.160 0.0882 0.157 0.0878 0.160 0.0878sigma_e 0.0570 0.0570 0.0570 0.0570 0.0570 0.0570 0.0570 0.0570 0.0570 0.0570 0.0570 0.0570N of groups 727 727 728 728 727 727 728 728 727 727 728 728

Registered Private crechesThree-level alignment

Average Taxable Income

Average Cost per SeatApplications per 0_3 population

Resident population

VARIA BLES HT_1 HT_2 HT_3 HT_4 HT_5 HT_6

0.00*** 0.00*** 0.00*** Average Taxable Income (6.09) (4.29) (4.18)

-0.00 0.00 -0.00 0.00 0.00 0.00 Resident Population

(-0.66) (0.17) (-0.20) (0.41) (0.10) (0.68) -0.00*** -0.00*** -0.00*** -0.00*** -0.00*** -0.00*** Average Cost per

Seat (-14.14) (-14.59) (-14.38) (-14.63) (-14.42) (-14.52) 0.68*** 0.66*** 0.66*** 0.66*** 0.66*** 0.66*** Applications per 0_3

population (27.43) (26.50) (26.86) (26.48) (26.77) (26.26) 0.00*** 0.00*** 0.00*** 0.00*** 0.00*** 0.00*** Registered Private

crèches (3.34) (3.78) (3.40) (3.77) (3.38) (3.73) 0.03 0.03 0.03

Grants Dependency (1.57) (1.61) (1.60) 0.01*** 0.01** 0.01*** 0.01** 0.01*** 0.01** Three-level

alignment (3.56) (2.85) (3.48) (2.91) (3.55) (2.96) 0.09*** 0.10*** 0.12*** 0.13*** Funding based on

Usage (7.47) (7.88) (5.26) (5.35) 0.05*** 0.05*** 0.09*** 0.09***

Funding complexity (3.74) (3.58) (5.49) (5.53) 0.12*** 0.26*** 0.20*** 0.32*** 0.11 -0.53

Constant (4.32) (24.31) (6.68) (25.46) (0.78) (-0.99)

Macro Area Fixed Effects No No Yes Yes No No Regional Fixed Effects No No No No Yes Yes

Observations 3850 3850 3850 3850 3850 3850 N of groups 727 728 727 728 727 728 #coefficients 8 8 11 11 25 25 sigma_u 0.159 0.163 0.152 0.154 0.138 0.140 sigma_e 0.0569 0.0570 0.0569 0.0570 0.0569 0.0570 rho 0.887 0.891 0.878 0.879 0.855 0.857

2.00*** 1.79 2.25*(7.04) (0.60) (2.30)0.00 0.00 0.00(1.18) (0.41) (0.39)-0.00 0.00 -0.00(-0.06) (0.07) (-0.00)-0.00*** -0.00 -0.00*(-6.69) (-1.02) (-2.49)-0.00 0.00 -0.00(-0.29) (0.03) (-0.34)0.05 0.07 0.06(1.49) (0.21) (0.36)-0.02 -0.01 -0.04(-0.73) (-0.08) (-0.68)0.01 0.04 0.06(0.34) (0.09) (0.47)

Regional Fixed Effect No No YesMacro Area Fixed Effect No Yes NoObservations 3845 3845 3845Number of codente 727 727 727R-squared within 0.209 0.214 0.205R-squared between 0.799 0.797 0.798R-squared overall 0.715 0.719 0.708sigma_u 0.0973 0.146 0.114sigma_e 0.0629 0.0630 0.0631coefficients 7 10 25rho 0.705 0.842 0.766N of groups 727 727 727

Average Cost per Seat

Resident population

Average Taxable Income

Applications per 0_3 population

Three-level alignment

funding

grants_dependency

Constant

Preliminary conclusionsPreliminary conclusions

• It is apparent that the local politicians choices are driven by local preferences

• Local preferences need to be balanced with institutional incentives

• It might be important that government act directly on the demand side to implement the supply of social policies which affect families’ life