EU Financing and Regional Policy: Vertical Fiscal Externalities when Capital is Mobile

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EU Financing and Regional Policy: Vertical Fiscal Externalities when Capital is Mobile

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Robert Fenge
Matthias Wrede

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Abstract

This paper considers the EU regional policy and analyzes two kinds of externalities that can explain why matching grants are used to subsidize regional infrastructure: horizontal pecuniary externalities via capital markets, and positive vertical fiscal externalities created by the financing of the EU budget. Matching grants should correct for both externalities. As an extension the paper considers possible alternatives of the EU financing system and malevolent governments. While a tax on the GDP of the member states would increase the vertical fiscal externality, governments that misuse funds decrease it. However, calculations of the size of externalities show that matching grant rates needed for internalization are quite low.

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

Volume (Year): 63 (2007)
Issue (Month): 4 (December)
Pages: 457-476
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Handle: RePEc:mhr:finarc:urn:sici:0015-2218(200712)63:4_457:efarpv_2.0.tx_2-t

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Find related papers by JEL classification:
H54 - Public Economics - - National Government Expenditures and Related Policies - - - Infrastructures
H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism
H87 - Public Economics - - Miscellaneous Issues - - - International Fiscal Issues; International Public Goods

Cited by:
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Bischoff, Ivo, 2008. "Conditional Grants, Grant-Seeking and Welfare when there is Government Failure on the Subordinate Level," ZEW Discussion Papers 08-031, ZEW - Zentrum fÃ¼r EuropÃ¤ische Wirtschaftsforschung / Center for European Economic Research. [Downloadable!]

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