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Ex-post redistribution in a federation: Implications for corrective policy

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  • Kothenburger, Marko

Abstract

This paper analyzes whether changes in the timing of equalizing transfers to state governments necessitate an adjustment in federal corrective policy. According to the existing literature (assuming an ex-ante choice of transfers), the corrective grant is equal to the marginal damage/benefit inflicted by externality generation. When the federal government accommodates state finances ex-post, the grant differs in formula from existing prescription. Allocative federal policy corrects state policy incentives twofold. It entails a correction for the distortion in the marginal benefit of state spending (as in earlier literature) and for the distortion in the marginal cost of public funds induced by the ex-post provision of transfers. The required grant rule is generically disproportionate to the equilibrium externality (even with lump-sum taxation). Furthermore, the ex-post provision of transfers is critical for the nature of the equilibrium inefficiency. Equalizing transfers at least partly internalize consumption spill-overs, but simultaneously establishes a new source of inefficiency. As a final result, the existing prescription for allocative federal policy continues to apply if the public good is pure.

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Bibliographic Info

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

Volume (Year): 91 (2007)
Issue (Month): 3-4 (April)
Pages: 481-496

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Handle: RePEc:eee:pubeco:v:91:y:2007:i:3-4:p:481-496

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Web page: http://www.elsevier.com/locate/inca/505578

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Citations

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Cited by:
  1. Heijdra, Ben J. & Ligthart, Jenny E., 2007. "Fiscal policy, monopolistic competition, and finite lives," Journal of Economic Dynamics and Control, Elsevier, vol. 31(1), pages 325-359, January.
  2. Aronsson, Thomas, 2010. "Optimal income taxation and decentralized fiscal federalism," Regional Science and Urban Economics, Elsevier, vol. 40(4), pages 187-195, July.
  3. Karolina Kaiser & Emmanuelle Taugourdeau, 2013. "The timing of elections in federations: a disciplining device against soft budget constraints?," Public Choice, Springer, vol. 154(3), pages 197-215, March.
  4. repec:hal:journl:halshs-00492085 is not listed on IDEAS
  5. Foremny, Dirk, 2011. "Vertical aspects of sub-national deficits: the impact of fiscal rules and tax autonomy in European countries," MPRA Paper 32998, University Library of Munich, Germany.
  6. Marko Köthenbürger, 2008. "How Do Local Governments Decide on Public Policy in Fiscal Federalism? Tax vs. Expenditure Optimization," CESifo Working Paper Series 2385, CESifo Group Munich.
  7. Aronsson, Thomas & Persson, Lars, 2012. "Decentralized fiscal federalism revisited: Optimal income taxation and public goods under horizontal leadership," Economics Letters, Elsevier, vol. 117(1), pages 223-226.
  8. Marko Köthenbürger, 2007. "Federal Tax-Transfer Policy and Intergovernmental Pre-Commitment," CESifo Working Paper Series 2054, CESifo Group Munich.
  9. Sengupta, Bodhisattva, 2011. "Provision of public goods in a federal economy: The role of party politics," European Journal of Political Economy, Elsevier, vol. 27(1), pages 104-119, March.
  10. Karolina Kaiser & Emmanuelle Taugourdeau, 2010. "The Timing of Elections in Federations : A Disciplining Device against Soft Budget Constraints ?," PSE - Labex "OSE-Ouvrir la Science Economique" halshs-00492085, HAL.
  11. Zarko Y. Kalamov, 2012. "Prudent Fiscal Policy in the Presence of Bailout Expectations," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 68(4), pages 365-382, December.

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