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Fiscal Equalization and Yardstick Competition

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  • Christos Kotsogiannis
  • Robert Schwager

Abstract

A multi-jurisdictional system is thought to improve, through yardstick competition, accountability. At the same time equalization programs, a common feature of multi-jurisdictional systems, are thought to be a prerequisite for both efficiency of the internal market and the equity objective of the equal treatment of equals. This paper shows that such programs, by reducing the information context of comparisons across jurisdictions, introduce perverse fiscal incentives and thus reduce accountability. The consequence of this is that equilibrium rent-taking increases with the intensity of equalization transfers.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 1865.

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Date of creation: 2006
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Handle: RePEc:ces:ceswps:_1865

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Keywords: equalization transfer programs; fiscal capacity; rent-seeking; fiscal federalism;

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References

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Citations

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Cited by:
  1. Kalb, Alexander, 2008. "The Impact of Intergovernmental Grants on Cost Efficiency: Theory and Evidence from German Municipalities," ZEW Discussion Papers 08-051, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  2. Oto-Peralías, Daniel & Romero-Ávila, Diego & Usabiaga, Carlos, 2013. "Does fiscal decentralization mitigate the adverse effects of corruption on public deficits?," European Journal of Political Economy, Elsevier, vol. 32(C), pages 205-231.
  3. Hikaru Ogawa & David E. Wildasin, 2009. "Think Locally, Act Locally: Spillovers, Spillbacks, and Efficient Decentralized Policymaking," American Economic Review, American Economic Association, vol. 99(4), pages 1206-17, September.
  4. Weingast, Barry R., 2009. "Second generation fiscal federalism: The implications of fiscal incentives," Journal of Urban Economics, Elsevier, vol. 65(3), pages 279-293, May.
  5. Daniel Oto Peralías & Diego Romero-Ávila & Carlos Usabiaga, 2013. "Does fiscal decentralization mitigate the adverse effects of corruption on public deficit?," EcoMod2013 5690, EcoMod.
  6. Alexander Kalb, 2010. "The Impact of Intergovernmental Grants on Cost Efficiency: Theory and Evidence from German Municipalities," Economic Analysis and Policy (EAP), Queensland University of Technology (QUT), School of Economics and Finance, vol. 40(1), pages 21-63, March.
  7. Kotsogiannis, Christos & Schwager, Robert, 2008. "Accountability and fiscal equalization," Journal of Public Economics, Elsevier, vol. 92(12), pages 2336-2349, December.
  8. David Wildasin, 2007. "Pre-Emption: Federal Statutory Intervention in State Taxation," Working Papers, University of Kentucky, Institute for Federalism and Intergovernmental Relations 2007-05, University of Kentucky, Institute for Federalism and Intergovernmental Relations.

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