Voluntary matching grants can forestall social dumping
AbstractThe European economic integration leads to increasing mobility of factors, thereby threatening the stability of social transfer programs. This paper investigates the possibility to achieve by means of voluntary matching grants both the optimal allocation of factors and the optimal level of redistribution in the presence of factor mobility. We use a fiscal competition model a la Wildasin (1991) in which states differ in their technologies and preferences for redistribution. We first investigate a simple process in which the regulatory authority progressively raises the matching grants to the district choosing the lowest transfer and all districts respond optimally to the resulting change in transfers all around. This process is shown to increase total production and the level of reditribution. However it does not guarantee that all districts gain, nor that an efficient level of redistribution is attained. Assuming complete information among districts, we first derive the willingness of each district to match the contribution of other districts and we show that the aggregate willingness to pay for matching rates converges to zero when both the efficient level of redistribution and the efficient allocation of factors are achieved. We then describe the ajustment process for the matching rates that will lead districts to the efficient outcome and guarantee that everyone will gain.
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Bibliographic InfoPaper provided by Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) in its series CORE Discussion Papers with number 2006111.
Date of creation: 00 Dec 2006
Date of revision:
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ﬁscal federalism; adjustment process; matching grants;
Other versions of this item:
- Jacques H. Drèze & Charles Figuières & Jean Hindriks, 2006. "Voluntary Matching Grants Can Forestall Social Dumping," CESifo Working Paper Series 1867, CESifo Group Munich.
- Jacques H. DREZE & Charles FIGUIERES & Jean, HINDRIKS, 2006. "Vountary matching grants can forestall social dumping," Discussion Papers (ECON - DÃ©partement des Sciences Economiques) 2006063, Université catholique de Louvain, Département des Sciences Economiques.
- Jacques Drèze & Charles Figuières & Jean Hindriks, 2006. "Voluntary Matching Grants can Forestall Social Dumping," Working Papers 06-13, LAMETA, Universtiy of Montpellier, revised Nov 2006.
- H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
- H70 - Public Economics - - State and Local Government; Intergovernmental Relations - - - General
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