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Fiscal Externalities and Asymmetric Information in an Economic Federation

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  • Aronsson, Thomas

    ()
    (Department of Economics, Umeå University)

  • Wikström, Magnus

    ()
    (Department of Economics, Umeå University)

Abstract

This paper analyzes optimal taxation and provision of public goods in an economy where tax and expenditure decisions are being made by both central and local governments. The main contribution of the paper is to address the implications of informational asymmetries, such that the central government cannot fully observe differences in local preferences. In case the differences across localities only refer to their preferences for local public goods, we show how the central government can implement the socially optimal resource allocation by means of subsidizing local provision of the federal (or central) public good. We also examine the welfare effects of such subsidies, when the socially optimal resource allocation is not a feasible policy option.

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Bibliographic Info

Paper provided by Umeå University, Department of Economics in its series Umeå Economic Studies with number 516.

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Length: 20 pages
Date of creation: 15 Oct 1999
Date of revision:
Handle: RePEc:hhs:umnees:0516

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Postal: Department of Economics, Umeå University, S-901 87 Umeå, Sweden
Phone: 090 - 786 61 42
Fax: 090 - 77 23 02
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Web page: http://www.econ.umu.se/
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Keywords: Fiscal externalities; informational asymmetries: optimal taxation and provision of public goods;

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Cited by:
  1. Linda Andersson & Thomas Aronsson & Magnus Wikstr–m, 2004. "Testing for Vertical Fiscal Externalities," International Tax and Public Finance, Springer, Springer, vol. 11(3), pages 243-263, 05.
  2. Aronsson, Thomas & Wikström, Magnus, 2001. "Optimal Taxation and Risk-Sharing Arrangements in an Economic Federation," UmeÃ¥ Economic Studies, UmeÃ¥ University, Department of Economics 538, Umeå University, Department of Economics.

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