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How Much Fiscal Equalisation?

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Author Info
Robert Fenge ()
Jakob von Weizsaecker ()

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Abstract

We treat fiscal equalisation as an insurance device against regional tax revenue variance. This insurance comes at the price of a moral hazard: regional government will spend too little effort on the development of the local tax base. In a simple bargaining model with two identical regions we show that less than total fiscal equalisation combined with lump sum transfers will be optimal. Taking a step back to the constitutional bargaining behind some veil of ignorance which determines the fallback position for later negotiations, we show that writing total fiscal equalisation into the constitution will be optimal.

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Publisher Info
Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number CESifo Working Paper No. 366.

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Date of creation: 2000
Date of revision:
Handle: RePEc:ces:ceswps:_366

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Related research
Keywords: Fiscal equalisation; constitutional bargaining; moral hazard;

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

References listed on IDEAS
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. Michael Smart, 1998. "Taxation and Deadweight Loss in a System of Intergovernmental Transfers," Canadian Journal of Economics, Canadian Economics Association, vol. 31(1), pages 189-206, February.
  2. Lockwood, Ben, 1999. "Inter-regional insurance," Journal of Public Economics, Elsevier, vol. 72(1), pages 1-37, April. [Downloadable!] (restricted)
  3. Bernd Huber, 2000. "A Tax on Tax Revenue. The Incentive Effects of Equalizing Transfers: Evidence from Germany," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
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This page was last updated on 2009-12-14.

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