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Insurance and Incentive Effects of Transfers among Regions: Equity and Efficiency

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  • S. Bucovetsky

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Abstract

When productivity shocks across regions are less-than-perfectlycorrelated, there are gains from federation, even if the regionsare identical ex ante. For the federation to provide insurancefor these productivity shocks, it must introduce some sort of“equalizing” transfer programme among regions. But any suchtransfer programme induces a form of moral hazard as well, ifregions still have some control over their own policies. Oneof the implications of this moral hazard is that the progressivityof the overall (regional together with federal) tax system willbe increased when the federal transfer programme is expanded. Copyright Kluwer Academic Publishers 1997

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Bibliographic Info

Article provided by Springer in its journal International Tax and Public Finance.

Volume (Year): 4 (1997)
Issue (Month): 4 (November)
Pages: 463-483

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Handle: RePEc:kap:itaxpf:v:4:y:1997:i:4:p:463-483

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Web page: http://www.springerlink.com/link.asp?id=102915

Related research

Keywords: Federalism; Uncertainty; Risk Aversion; Redistribution;

References

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  1. Alberto Alesina & Roberto Perotti, 1995. "Economic Risk and Political Risk in Fiscal Unions," NBER Working Papers 4992, National Bureau of Economic Research, Inc.
  2. Bent E. Soerensen & Pierfederico Asdrubali & Oved Yosha, . "Channels of Interstate Risksharing: US 1963-1990," EPRU Working Paper Series 95-04, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics.
  3. Johnson, William R, 1988. "Income Redistribution in a Federal System," American Economic Review, American Economic Association, vol. 78(3), pages 570-73, June.
  4. Osborne, Martin J & Slivinski, Al, 1996. "A Model of Political Competition with Citizen-Candidates," The Quarterly Journal of Economics, MIT Press, vol. 111(1), pages 65-96, February.
  5. Rogoff, Kenneth, 1985. "The Optimal Degree of Commitment to an Intermediate Monetary Target," The Quarterly Journal of Economics, MIT Press, vol. 100(4), pages 1169-89, November.
  6. repec:fth:coluec:758 is not listed on IDEAS
  7. Wildasin, David E. & Wilson, John Douglas, 1998. "Risky local tax bases: risk-pooling vs. rent-capture," Journal of Public Economics, Elsevier, vol. 69(2), pages 229-247, June.
  8. Tim Besley & Stephen Coate, . ""An Economic Model of Representative Democracy''," CARESS Working Papres 95-02, University of Pennsylvania Center for Analytic Research and Economics in the Social Sciences.
  9. Persson, Torsten & Tabellini, Guido, 1996. "Federal Fiscal Constitutions: Risk Sharing and Moral Hazard," Econometrica, Econometric Society, vol. 64(3), pages 623-46, May.
  10. Bucovetsky, Sam, 1991. "Choosing tax rates and public expenditure levels using majority rule," Journal of Public Economics, Elsevier, vol. 46(1), pages 113-131, October.
  11. Wildasin, David E, 1991. "Income Redistribution in a Common Labor Market," American Economic Review, American Economic Association, vol. 81(4), pages 757-74, September.
  12. Michael Smart, 1996. "Taxation incentives and deadweight loss in a system of intergovernmental transfers," Working Papers msmart-96-03, University of Toronto, Department of Economics.
  13. Grandmont, Jean-Michel, 1978. "Intermediate Preferences and the Majority Rule," Econometrica, Econometric Society, vol. 46(2), pages 317-30, March.
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Citations

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Cited by:
  1. Hans-Günter Krüsselberg, 2005. "Milton Friedman und der Wissenschaftliche Beirat für Familienfragen Elternkompetenz und Anteilscheine am Schulbudget – Gedanken über Reformpotenziale," Marburg Working Papers on Economics 200506, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
  2. Buettner, Thiess, 2009. "The contribution of equalization transfers to fiscal adjustment: Empirical results for German municipalities and a US-German comparison," Journal of Comparative Economics, Elsevier, vol. 37(3), pages 417-431, September.
  3. Konrad, Kai A. & Seitz, Helmut, 2001. "Fiscal federalism and risk sharing in Germany: the role of size differences," Discussion Papers, Research Unit: Market Processes and Governance FS IV 01-20, Social Science Research Center Berlin (WZB).
  4. Wallace Oates, 2005. "Toward A Second-Generation Theory of Fiscal Federalism," International Tax and Public Finance, Springer, vol. 12(4), pages 349-373, August.
  5. Wouter Vermeulen & Maarten Allers, 2013. "Fiscal Equalization and Capitalization: Evidence from a Policy Reform," CPB Discussion Paper 245, CPB Netherlands Bureau for Economic Policy Analysis.
  6. GRECO, Luciano, 2003. "Optimal grants under asymmetric information: federalism versus devolution," CORE Discussion Papers 2003024, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).

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