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Optimal Regional Redistribution Under Asymmetric Information

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  • Massimo Bordignon
  • Paolo Manasse
  • Guido Tabellini

Abstract

This paper studies optimal redistribution among two different regions in a federal state. Regional governments supply local public goods financed with distorting local taxes. They have better information on their tax bases than the federal government. We model this both as an adverse selection problem on the size of local tax bases and/or as moral hazard problem on local tax enforcement. Moral hazard alone does not affect the first best redistribution rule, which is a lump sum transfer from the rich to the poor region. In all other cases the optimal transfer rule involves a lump sum tax on the rich regions and a premium for fiscal effort by the poor regions, with the transfer falling short of the first-best level. In the equilibrium with moral hazard and adverse selection, tax evasion occurs only in the poor region, even though the possibility of lax tax enforcement benefits the rich and harms the poor region because it reduces equilibrium redistribution.

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Paper provided by IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University in its series Working Papers with number 93.

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Handle: RePEc:igi:igierp:93

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  1. Joseph E. Stiglitz, 1981. "Self-Selection and Pareto Efficient Taxation," NBER Working Papers 0632, National Bureau of Economic Research, Inc.
  2. Mirrlees, James A, 1971. "An Exploration in the Theory of Optimum Income Taxation," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 38(114), pages 175-208, April.
  3. Horst Raff & John Wilson, 1997. "Income Redistribution with Well-Informed Local Governments," International Tax and Public Finance, Springer, Springer, vol. 4(4), pages 407-427, November.
  4. Bucovetsky, S. & Marchand, M. & Pestieau, P., 1998. "Tax Competition and Revelation of Preferences for Public Expenditure," Journal of Urban Economics, Elsevier, vol. 44(3), pages 367-390, November.
  5. SALMON, Pierre, 1987. "Decentralization as an incentive scheme," Institut des Mathématiques Economiques – Document de travail de l’I.M.E. (1974-1993), Institut des Mathématiques Economiques. LATEC, Laboratoire d'Analyse et des Techniques EConomiques, CNRS, Un 98, Institut des Mathématiques Economiques. LATEC, Laboratoire d'Analyse et des Techniques EConomiques, CNRS, Université de Bourgogne.
  6. Lockwood, Ben, 1998. "Distributive Politics and the Benefits of Decentralisation," CSGR Working papers series, Centre for the Study of Globalisation and Regionalisation (CSGR), University of Warwick 10/98, Centre for the Study of Globalisation and Regionalisation (CSGR), University of Warwick.
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  8. 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.
  9. BORDIGNON, Massimo & MINELLI, Enrico, . "Rules transparency and political accountability," CORE Discussion Papers RP, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) -1522, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  10. Massimo Bordignon & Paolo Manasse & Guido Tabellini, 2001. "Optimal Regional Redistribution under Asymmetric Information," American Economic Review, American Economic Association, American Economic Association, vol. 91(3), pages 709-723, June.
  11. Paolo Manasse & Christian Schultz, . "Regional Redistribution and Migration," Working Papers, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University 146, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  12. Laura Bottazzi & Paolo Manasse, . "Bankers' versus Workers' Europe (I): Asymmetric Information in EMU," Working Papers, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University 127, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  13. Bordignon, Massimo & Brusco, Sandro, 2001. "Optimal secession rules," European Economic Review, Elsevier, Elsevier, vol. 45(10), pages 1811-1834, December.
  14. Lucas, Robert E, Jr, 1990. "Supply-Side Economics: An Analytical Review," Oxford Economic Papers, Oxford University Press, vol. 42(2), pages 293-316, April.
  15. Persson, Torsten & Tabellini, Guido, 1996. "Federal Fiscal Constitutions: Risk Sharing and Redistribution," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 104(5), pages 979-1009, October.
  16. Wildasin, David E, 1991. "Income Redistribution in a Common Labor Market," American Economic Review, American Economic Association, American Economic Association, vol. 81(4), pages 757-74, September.
  17. Bolton, Patrick & Roland, Gerard, 1996. "Distributional Conflicts, Factor Mobility, and Political Integration," American Economic Review, American Economic Association, American Economic Association, vol. 86(2), pages 99-104, May.
  18. Robin W. Boadway & Frank R. Flatters, 1982. "Efficiency and Equalization Payments in a Federal System of Government: A Synthesis and Extension of Recent Results," Canadian Journal of Economics, Canadian Economics Association, Canadian Economics Association, vol. 15(4), pages 613-33, November.
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