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Optimal Regional Redistribution under Asymmetric Information

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  • Massimo Bordignon
  • Paolo Manasse
  • Guido Tabellini

Abstract

This paper studies optimal redistribution among two different regions in a federal state. Regional governments supply local public goods financed by distorting local taxes. They have better information on their tax bases than the federal government. We model this both as an adverse selection problem relating to the size of local tax bases and/or as a moral hazard problem relating to local tax enforcement. Moral hazard alone does not affect the first-best redistribution rule, which is a lump sum transfer from the rich to the poor region. In all other cases the optimal transfer rule involves a lump sum tax on the rich regions and a premium for fiscal effort by the poor regions, with the transfer falling short of the first-best level. In the equilibrium with moral hazard and adverse selection, tax evasion occurs only in the poor region, even though the possibility of lax tax enforcement benefits the rich and harms the poor region because it reduces equilibrium redistribution.

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Bibliographic Info

Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 91 (2001)
Issue (Month): 3 (June)
Pages: 709-723

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Handle: RePEc:aea:aecrev:v:91:y:2001:i:3:p:709-723

Note: DOI: 10.1257/aer.91.3.709
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  1. Robin W. Boadway & Frank R. Flatters, 1982. "Efficiency and Equalization Payments in a Federal System of Government: A Synthesis and Extension of Recent Results," Canadian Journal of Economics, Canadian Economics Association, vol. 15(4), pages 613-33, November.
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  3. Stiglitz, Joseph E., 1982. "Self-selection and Pareto efficient taxation," Journal of Public Economics, Elsevier, vol. 17(2), pages 213-240, March.
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  7. Massimo Bordignon & Paolo Manasse & Guido Tabellini, 2001. "Optimal Regional Redistribution under Asymmetric Information," American Economic Review, American Economic Association, vol. 91(3), pages 709-723, June.
  8. Persson, Torsten & Tabellini, Guido, 1996. "Federal Fiscal Constitutions: Risk Sharing and Redistribution," Journal of Political Economy, University of Chicago Press, vol. 104(5), pages 979-1009, October.
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  14. Laura Bottazzi & Paolo Manasse, . "Bankers' versus Workers' Europe (I): Asymmetric Information in EMU," Working Papers 127, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  15. Lucas, Robert E, Jr, 1990. "Supply-Side Economics: An Analytical Review," Oxford Economic Papers, Oxford University Press, vol. 42(2), pages 293-316, April.
  16. Cornes, Richard C. & Silva, Emilson C. D., 2000. "Local Public Goods, Risk Sharing, and Private Information in Federal Systems," Journal of Urban Economics, Elsevier, vol. 47(1), pages 39-60, January.
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