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Interregional Redistribution and Budget Institutions under Asymmetric Information

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  • Bernd Huber
  • Marco Runkel

Abstract

Empirical evidence from the U.S. and the European Union suggests that regions which contribute to interregional redistribution face weaker borrowing constraints than regions which benefit from interregional redistribution. This paper presents an argument in favor of such differentiated budgetary institutions. It develops a two-period model of a federation consisting of two types of regions. The federal government redistributes from one type of regions (contributors) to the other type (recipients). It is shown that a fiscal constitution with lax budget rules for contributors and strict budget rules for recipients solves the self-selection problem the federal government faces in the presence of asymmetric information regarding exogenous characteristics of the regions.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 1491.

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Date of creation: 2005
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Handle: RePEc:ces:ceswps:_1491

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Keywords: asymmetric information; interregional redistribution; borrowing rules;

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Cited by:
  1. Bernd Huber & Marco Runkel, 2005. "Interregional Redistribution and Budget Institutions under Asymmetric Information," CESifo Working Paper Series, CESifo Group Munich 1491, CESifo Group Munich.
  2. Dirk Niepelt & Martin Gonzalez-Eiras, 2007. "Sustaining Social Security," 2007 Meeting Papers, Society for Economic Dynamics 95, Society for Economic Dynamics.
  3. Plachta, Robert C., 2008. "Fiscal Equalisation and the Soft Budget Constraint," FiFo Discussion Papers - Finanzwissenschaftliche Diskussionsbeiträge, University of Cologne, FiFo Institute for Public Economics 08-8, University of Cologne, FiFo Institute for Public Economics.
  4. Herold, Katharina, 2009. "Intergovernmental grants and financial autonomy under asymmetric information," FiFo Discussion Papers - Finanzwissenschaftliche Diskussionsbeiträge, University of Cologne, FiFo Institute for Public Economics 09-2, University of Cologne, FiFo Institute for Public Economics.

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