Intergovernmental competition, voice and exit options and the design of fiscal structure

Abstract

Taxpayers may reveal their assessment of policy through exercise of available voice and exit options within the fiscal constitution. The voice option is utilized when taxpayers remain within political boundaries and attempt to communicate their assessments regarding the institutionalstatus quo to policymakers. Exercise of the exit option occurs when taxpayers signal discontent with thestatus quo by purchasing from another government supplier. This paper discusses and contrasts theconventional andconstitutional economics views toward fiscal design and argues that a major difference exists regarding the issue of who should be awarded primary responsibility in the policy process: taxpayers or policymakers? Because voice and exit options determine the relative leverage of taxpayers and policymakers in the policy process, it is argued that the design of voice and exit options in the fiscal constitution exerts a predictable influence on policy. The paper concludes that one's view toward the design of voice and exit options is affected by one's perception of the appropriate size of government. Competitive fiscal structures tend to be advocated by those who believe that government tends to overexpand and monopolistic structures tend to be advocated by those who believe that government tends to be too small.