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Gross versus net equalization scheme in a federation with decentralized leadership

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  • Breuillé, Marie-Laure
  • Madiès, Thierry
  • Taugourdeau, Emmanuelle

Abstract

This paper compares the impact of two equalization transfer schemes on regional budgetary choices: a gross equalization scheme, where ex-post transfers to regions are financed from federal tax revenues, and a net equalization scheme, where region-to-region ex-post transfers allocated by the federal government are self-financed. The net equalization scheme reduces ex-post federal intervention and should therefore be favored over the gross equalization scheme in order to reduce opportunistic regional behaviour. In addition, the two equalization schemes differently affect the composition of public expenditures. The gross equalization scheme generates an upward distortion of the amount of capital public expenditures whereas the net equalization scheme generates a downward distortion of the amount of current public expenditures compared to the optimum. A welfare analysis reveals that incentives to use a net equalization scheme are strengthened for a sufficiently high number of regions.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Urban Economics.

Volume (Year): 68 (2010)
Issue (Month): 2 (September)
Pages: 205-214

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Handle: RePEc:eee:juecon:v:68:y:2010:i:2:p:205-214

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Web page: http://www.elsevier.com/locate/inca/622905

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Keywords: Decentralized leadership Fiscal federalism Gross and net equalization schemes Current and capital public expenditures;

References

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Citations

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Cited by:
  1. Allers, Maarten A. & Toolsema, Linda A., 2012. "Welfare financing: Grant allocation and efficiency," Research Report, University of Groningen, Research Institute SOM (Systems, Organisations and Management) 12004-EEF, University of Groningen, Research Institute SOM (Systems, Organisations and Management).
  2. Arthur Caplan & Emilson Silva, 2011. "Impure public goods, matching grant rates and income redistribution in a federation with decentralized leadership and imperfect labor mobility," International Tax and Public Finance, Springer, Springer, vol. 18(3), pages 322-336, June.
  3. Linda Toolsema & Maarten Allers, 2014. "Welfare Financing: Grant Allocation and Efficiency," De Economist, Springer, Springer, vol. 162(2), pages 147-166, June.
  4. Yongzheng Liu, 2014. "Does competition for capital discipline governments? The role of fiscal equalization," International Tax and Public Finance, Springer, Springer, vol. 21(3), pages 345-374, June.
  5. Yongzheng Liu & Jorge Martinez-Vazquez, 2011. "Public Input Competition, Stackelberg Equilibrium and Optimality," International Center for Public Policy Working Paper Series, at AYSPS, GSU, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University paper1123, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.

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