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Vountary matching grants can forestall social dumping

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  • Jacques H. DREZE

    (UNIVERSITE CATHOLIQUE DE LOUVAIN, Center for Operations Research and Econometrics (CORE))

  • Charles FIGUIERES
  • Jean, HINDRIKS

    (UNIVERSITE CATHOLIQUE DE LOUVAIN, Department of Economics)

Abstract

The 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 matchning grants sto 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 redistribution. 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 outcome and guarantee that everyone will gain.

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Paper provided by Université catholique de Louvain, Département des Sciences Economiques in its series Discussion Papers (ECON - Département des Sciences Economiques) with number 2006063.

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Length: 22
Date of creation: 01 Nov 2006
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Handle: RePEc:ctl:louvec:2006063

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Keywords: Fiscal federalism; Adjustment process; Matching grants;

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  1. Hans-Werner Sinn, 2004. "The New Systems Competition," Perspektiven der Wirtschaftspolitik, Verein für Socialpolitik, vol. 5(1), pages 23-38, 02.
  2. Kevin Roberts, 1999. "Dynamic voting in clubs," LSE Research Online Documents on Economics 19349, London School of Economics and Political Science, LSE Library.
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  7. Jean Hindriks & Gareth D. Myles, 2003. "Strategic Inter-Regional Transfers," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 5(2), pages 229-248, 04.
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  9. Andreas Pfingsten & Andreas Wagener, 1997. "Centralized vs. Decentralized Redistribution: A Case for Interregional Transfer Mechanisms," International Tax and Public Finance, Springer, vol. 4(4), pages 429-451, November.
  10. FIGUIÈRES , Charles & HINDRIKS, Jean, . "Matching grants and Ricardian equivalence," CORE Discussion Papers RP -1559, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  11. Malinvaud, Edmond, 1972. "Prices for Individual Consumption, Quantity Indicators for Collective Consumption," Review of Economic Studies, Wiley Blackwell, vol. 39(4), pages 385-405, October.
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  13. Sinn, Hans-Werner, 1990. "Tax harmonization and tax competition in Europe," European Economic Review, Elsevier, vol. 34(2-3), pages 489-504, May.
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  15. Guttman, Joel M, 1978. "Understanding Collective Action: Matching Behavior," American Economic Review, American Economic Association, vol. 68(2), pages 251-55, May.
  16. Wildasin, David E, 1991. "Income Redistribution in a Common Labor Market," American Economic Review, American Economic Association, vol. 81(4), pages 757-74, September.
  17. Jan K. Brueckner, 1999. "Welfare Reform and the Race to the Bottom: Theory and Evidence," Southern Economic Journal, Southern Economic Association, vol. 66(2), pages 505-525, January.
  18. Hindriks, J., 1998. "Tax versus Transfer Competition," Discussion Papers 9808, Exeter University, Department of Economics.
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