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Ex-Post Redistribution in a Federation: Implications for Corrective Policy

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Author Info
Marko Köthenbürger ()

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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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Paper provided by CESifo GmbH in its series CESifo Working Paper Series with number CESifo Working Paper No. 1754.

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Date of creation: 2006
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Handle: RePEc:ces:ceswps:_1754

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Related research
Keywords: federalism externality corrective grant equalization commitment

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Find related papers by JEL classification:
D62 - Microeconomics - - Welfare Economics - - - Externalities
H10 - Public Economics - - Structure and Scope of Government - - - General
H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General
H70 - Public Economics - - State and Local Government; Intergovernmental Relations - - - General

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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Marko Koethenbuerger, 2007. "Federal Tax-Transfer Policy and Intergovernmental Pre-Commitment," CESifo Working Paper Series CESifo Working Paper No. , CESifo GmbH. [Downloadable!]
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