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A Theory of Fiscal Imbalance

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Author Info
Robin Boadway
Jean-François Tremblay

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Abstract

This paper examines how sequential decision-making by two levels of government can result in fiscal imbalances. Federal-regional transfers serve to equalize the marginal cost of public funds between regions hit by different shocks. The optimal transfers minimize the efficiency cost of taxation in the federation as a whole. The analysis shows how the existence of vertical fiscal externalities, leading regional governments to overprovide public goods, can induce the federal government to create a fiscal imbalance by selecting transfers that differ from the optimal ones. When the federal government can commit to its policies before regional governments select their level of expenditures, the fiscal imbalance will generally be negative. In the absence of commitment, the equilibrium transfer is unambiguously larger than the optimal fiscal gap, resulting in a positive fiscal imbalance.

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Publisher Info
Article provided by Mohr Siebeck, Tübingen in its journal FinanzArchiv.

Volume (Year): 62 (2006)
Issue (Month): 1 (March)
Pages: 1-27
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Handle: RePEc:mhr:finarc:urn:sici:0015-2218(200603)62:1_1:atofi_2.0.tx_2-o

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Related research
Keywords: fiscal imbalance intergovernment transfers commitment fiscal externalities

Find related papers by JEL classification:
H72 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Budget and Expenditures
H73 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Interjurisdictional Differentials and Their Effects
H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism

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This page was last updated on 2008-8-28.

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