The Progressivity of Equalization Payments in Federations
AbstractWe investigate the conditions under which an inequality averse and additively separable welfarist constitution maker would always choose to set up a progressive equalization payment scheme in a federation with local public goods. A progressive equalization payment scheme is defined as a list of per capita net (possibly negative) subsidies – one such net subsidy for every jurisdiction - that are decreasing with respect to jurisdictions per capita wealth. We examine the question in a setting in which the case for progressivity is a priori the strongest, namely, all citizens have the same utility function for the private good and the public good, inhabitants of a given jurisdiction are all identicals and are not able to move accross jurisdictions. We show that a necessary and sufficient condition that the objective function of the constitution maker must satisfy to favour a progressive equalization payment scheme for all distributions of wealth and all population sizes is to be additively separable between each jurisdiction’s per capita wealth and number of inhabitants. When interpreted for a mean of order social welfare function, this condition is shown to be equivalent to additive separability of the individual’s indirect utility function with respect to wealth and the price of the public good. Some implications of this restriction to the case where the citizen direct utility function is additively separable are also derived.
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Bibliographic InfoPaper provided by Institut d'economie publique (IDEP), Marseille, France in its series IDEP Working Papers with number 0408.
Length: 20 pages
Date of creation: Jul 2004
Date of revision: Jul 2004
Other versions of this item:
- Gravel, Nicolas & Poitevin, Michel, 2006. "The progressivity of equalization payments in federations," Journal of Public Economics, Elsevier, vol. 90(8-9), pages 1725-1743, September.
- GRAVEL, Nicolas & POITEVIN, Michel, 2004. "The Progressivity of Equalization Payments in Federations," Cahiers de recherche 2004-12, Universite de Montreal, Departement de sciences economiques.
- GRAVEL, Nicolas & POITEVIN, Michel, 2004. "The Progressivity of Equalization Payments in Federations," Cahiers de recherche 14-2004, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
- D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement
- H10 - Public Economics - - Structure and Scope of Government - - - General
- H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
- H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
- H41 - Public Economics - - Publicly Provided Goods - - - Public Goods
- H70 - Public Economics - - State and Local Government; Intergovernmental Relations - - - General
- H73 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Interjurisdictional Differentials and Their Effects
- H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism
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"Are Equalization Payments Making Canadians Better Off? A Two-Dimensional Dominance Answer,"
IDEP Working Papers
0608, Institut d'economie publique (IDEP), Marseille, France, revised 15 Nov 2006.
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