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Redistribution, In-Kind Transfers and Matching Grants when the Federal Government Lacks Information on Local Costs

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  • Blomquist, Sören

    ()
    (Department of Economics)

  • Micheletto, Luca

    (Department of Economics)

Abstract

Recent literature on optimal nonlinear taxation has shown that in models with a single level of government public provision of private goods can help redistribution by mitigating self-selection constraints. The aim of the present paper is to extend the analysis to a fiscal federalism setting with two levels of government. To accomplish this goal we start by explicitly modelling the informational asymmetry that in our framework motivates decentralization in the first place: the lower level is able to observe the local costs of production, which vary across localities, but the central level does not. Then, using an extended version of the optimal income taxation model with two ability types, we show that even though it is the lower level that is responsible for the public provision of private goods, in-kind transfers can still help the federal level to redistribute between high- and low skilled individuals. Finally, we characterize the optimal marginal tax rates, which take a different form from that of a unitary model, and the optimal matching grants. The latter, in particular, have a very different structure than the one derived in previous fiscal federalism studies. We also find that it is vital to model informational asymmetries between the central and the local level explicitly. Models where the informational asymmetry is not explicit might have very little to say about decentralization in economies where the local level has an informational advantage over the central level.

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Bibliographic Info

Paper provided by Uppsala University, Department of Economics in its series Working Paper Series with number 2004:15.

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Length: 34 pages
Date of creation: 18 Oct 2004
Date of revision:
Handle: RePEc:hhs:uunewp:2004_015

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Postal: Department of Economics, Uppsala University, P. O. Box 513, SE-751 20 Uppsala, Sweden
Phone: + 46 18 471 25 00
Fax: + 46 18 471 14 78
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Web page: http://www.nek.uu.se/
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Keywords: Optimal taxation; in-kind transfers; public provision of day care; fiscal federalism;

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References

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  1. Boadway, R. & Marchand, M., . "The use of public expenditures for redistributive purposes," CORE Discussion Papers RP -1131, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  2. Aronsson, Thomas & Blomquist, Sören, 2004. "Redistribution and Provision of Public Goods in an Economic Federation," UmeÃ¥ Economic Studies 636, Umeå University, Department of Economics.
  3. Bev Dahlby, 1996. "Fiscal externalities and the design of intergovernmental grants," International Tax and Public Finance, Springer, vol. 3(3), pages 397-412, July.
  4. Thomas Aronsson & Magnus Wikstrom, 2003. "Optimal taxation and risk-sharing arrangements in an economic federation," Oxford Economic Papers, Oxford University Press, vol. 55(1), pages 104-120, January.
  5. Bergstrom, T. & Blomqust, S., 1993. "The Political Econmomy of Subsidized Day Care," Papers 1993-15, Uppsala - Working Paper Series.
  6. Boadway, Robin & Marchand, Maurice & Vigneault, Marianne, 1998. "The consequences of overlapping tax bases for redistribution and public spending in a federation," Journal of Public Economics, Elsevier, vol. 68(3), pages 453-478, June.
  7. Sören Blomquist & Vidar Christiansen, 2003. "Is there a Case for Public Provision of Private Goods if Preferences are Heterogeneous? An Example with Day Care," CESifo Working Paper Series 938, CESifo Group Munich.
  8. Joseph E. Stiglitz, 1982. "Self-Selection and Pareto Efficient Taxation," NBER Working Papers 0632, National Bureau of Economic Research, Inc.
  9. Michael Keen, 1997. "Vertical Tax Externalities in the Theory of Fiscal Federalism," IMF Working Papers 97/173, International Monetary Fund.
  10. Lockwood, Ben, 1997. "Inter-Regional Insurance," Discussion Papers 9703, Exeter University, Department of Economics.
  11. repec:fth:louvco:9803 is not listed on IDEAS
  12. Robin Boadway and Michael Keen, . "Efficiency and the Optimal Direction of Federal-State Transfers," Economics Discussion Papers 445, University of Essex, Department of Economics.
  13. Stern, Nicholas, 1982. "Optimum taxation with errors in administration," Journal of Public Economics, Elsevier, vol. 17(2), pages 181-211, March.
  14. Blomquist, Suren & Christiansen, Vidar, 1995. " Public Provision of Private Goods as a Redistributive Device in an Optimum Income Tax Model," Scandinavian Journal of Economics, Wiley Blackwell, vol. 97(4), pages 547-67, December.
  15. Dahlby, Bev & Wilson, Leonard S., 2003. "Vertical fiscal externalities in a federation," Journal of Public Economics, Elsevier, vol. 87(5-6), pages 917-930, May.
  16. Cornes, Richard C. & Silva, Emilson C. D., 2000. "Local Public Goods, Risk Sharing, and Private Information in Federal Systems," Journal of Urban Economics, Elsevier, vol. 47(1), pages 39-60, January.
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