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A political economy model of the vertical fiscal gap and vertical fiscal imbalances in a federation

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Author Info

  • Bev Dahlby

    ()
    (University of Calgary)

  • Jonathan Rodden

    ()
    (Stanford University)

Abstract

We develop a political economy model of intergovernmental transfers. Vertical fiscal balance occurs in a federation when the ratio of the marginal benefit of the public services provided by the federal and provincial governments is equal to their relative marginal costs of production. With majority voting in national elections, the residents of a "pivotal province" will determine the level of transfers such that the residents of that province achieve a vertical fiscal balance in spending by the two levels of government. We test the predictions of the model using Canadian time series data and cross-section data for nine federations.

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Bibliographic Info

Paper provided by Institut d'Economia de Barcelona (IEB) in its series Working Papers with number 2013/18.

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Length: 46 pages
Date of creation: 2013
Date of revision:
Handle: RePEc:ieb:wpaper:2013/6/doc2013-18

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Keywords: Fiscal federalism; vertical fiscal imbalance; fiscal gap;

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References

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  1. Boadway, Robin & Tremblay, Jean-François, 2010. "Mobility And Fiscal Imbalance," National Tax Journal, National Tax Association, vol. 63(4), pages 1023-53, December.
  2. Helmut Cremer & Philippe De Donder & Dario Maldonado & Pierre Pestieau, 2007. "Voting over type and generosity of a pension system when some individuals are myopic," Working Papers 23283, Institut National de la Recherche Agronomique, France.
  3. Tiberiu Dragu & Jonathan Rodden, 2010. "Representation and regional redistribution in federations," Working Papers 2010/16, Institut d'Economia de Barcelona (IEB).
  4. Gary S. Becker & Casey B. Mulligan, 1998. "Deadweight Costs and the Size of Government," University of Chicago - George G. Stigler Center for Study of Economy and State 144, Chicago - Center for Study of Economy and State.
  5. CASAMATTA, Georges & CREMER, Helmuth & PESTIEAU, Pierre, . "Political sustainability and the design of social insurance," CORE Discussion Papers RP -1449, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  6. Crémer, Jacques & Palfrey, Thomas, 2000. "Federal Mandates by Popular Demand," IDEI Working Papers 120, Institut d'Économie Industrielle (IDEI), Toulouse, revised 2001.
  7. Tracy Snoddon & Jean-François Wen, 2003. "Grants structure in an intergovernmental fiscal game," Economics of Governance, Springer, vol. 4(2), pages 115-126, 08.
  8. Pereira, Paulo T C, 1996. " A Politico-economic Approach to Intergovernmental Lump-Sum Grants," Public Choice, Springer, vol. 88(1-2), pages 185-201, July.
  9. Dixit, Avinash & Londregan, John, 1998. "Fiscal federalism and redistributive politics," Journal of Public Economics, Elsevier, vol. 68(2), pages 153-180, May.
  10. Sharma, Chanchal Kumar, 2010. "Beyond Gaps and Imbalances: Re-Structuring the Debate on Intergovernmental Fiscal Relations," MPRA Paper 32145, University Library of Munich, Germany.
  11. Robin Boadway & Jean-Francois Tremblay, 2006. "A Theory of Vertical Fiscal Imbalance," Working Papers 1072, Queen's University, Department of Economics.
  12. Craig Volden, 2007. "Intergovernmental Grants: A Formal Model of Interrelated National and Subnational Political Decisions," Publius: The Journal of Federalism, Oxford University Press, vol. 37(2), pages 209-243, Spring.
  13. Robin Boadway & Jean-François Tremblay, 2006. "A Theory of Fiscal Imbalance," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 62(1), pages 1-27, March.
  14. Alberto Porto & Pablo Sanguinetti, 2001. "Political Determinants of Intergovernmental Grants: Evidence From Argentina," Economics and Politics, Wiley Blackwell, vol. 13(3), pages 237-256, November.
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