As a subfield of public economics, fiscal federalism is concerned with "understanding which functions and instruments are best centralized and which are best placed in the sphere of decentralized levels of government" (Oates, 1999).
In 2017, Governor of Rivers State of Nigeria, Ezenwo Nyesom Wike said that he believes true fiscal federalism will "strengthen the economy of his country as all sections will develop based on their comparative advantages".
[8] VFA acknowledges the inherent challenges in achieving a perfect balance or symmetry in fiscal relations between different levels of government.
This concept recognizes that a certain degree of asymmetry is an unavoidable and realistic aspect of fiscal federalism.
[3] It suggests a deviation from an ideal state of fiscal balance, which might not be practically achievable or even desirable in a federal system.
Moreover, the terminology of VFA is thought to implicitly support the devolution of funds to subnational governments.
Therefore, the concept of VFA offers a more nuanced framework for understanding the dynamics of fiscal federalism.
Charles Tiebout of the University of Washington argued that competition among communities ensures efficiency in the supply of local public goods, like it does a competition among private subjects in the supply of private goods.
The question of which activities should take place at which level of government is called optimal fiscal federalism.
[17] Reasons, why federal government might intervenes to the provision of public local goods include market failures and redistribution.
Another reason is that the federal government may try to offer states and localities incentives to undertake additional spending, from which will benefit also neighboring communities or the whole country.
The local state determines the level of expenditure and federal government pays a certain part of the amount.
When a community is offered an unconditional block grant, a lump-sum transfer shifts the budget constraint outwards.
Some empirical evidence indicates the presence of a so called "flypaper effect", which says that the grant leads to significantly greater spending on the desired local public goods.
The role of the OECD Network on Fiscal Relations Across Levels of Government, part of its Centre for Tax Policy and Administration, is to provide data and analysis on these relationships between organizations at different levels of government.