This paper studies optimal redistribution among two different regions in a federal state. Regional governments supply local public goods financed by distorting local taxes. They have better information on their tax bases than the federal government. We model this both as an adverse selection problem relating to the size of local tax bases and/or as a moral hazard problem relating to local tax enforcement. Moral hazard alone does not affect the first-best redistribution rule, which is a lump sum transfer from the rich to the poor region. In all other cases the optimal transfer rule involves a lump sum tax on the rich regions and a premium for fiscal effort by the poor regions, with the transfer falling short of the first-best level. In the equilibrium with moral hazard and adverse selection, tax evasion occurs only in the poor region, even though the possibility of lax tax enforcement benefits the rich and harms the poor region because it reduces equilibrium redistribution.
Download Info
To download:
If you experience problems downloading a file, check if you have the
proper application to
view it first. Information about this may be contained
in the File-Format links below. In case of further problems read
the IDEAS help
page. Note that these files are not on the IDEAS
site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Publisher Info
Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number
1437.
Find related papers by JEL classification: H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
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.:
Bordignon, Massimo & Brusco, Sandro, 1999.
"Optimal secession rules,"
ZEW Discussion Papers
99-51, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
[Downloadable!]
Other versions:
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.) This item has more than 25 citations. To prevent cluttering this page, these citations are listed on a separate page.