This file is part of IDEAS, which uses RePEc data


[ Papers | Articles | Software | Books | Chapters | Authors | Institutions | JEL Classification | NEP reports | Search | New papers by email | Author registration | Rankings | Volunteers | FAQ | Blog | Help! ]

A Theory of Vertical Fiscal Imbalance

Author info | Abstract | Publisher info | Download info | Related research | Statistics
Author Info
Robin Boadway () (Queen's University)
Jean-Francois Tremblay () (University of Ottawa)

Additional information is available for the following registered author(s):

Abstract

This paper examines how sequential decision-making by two levels of government can result in vertical fiscal imbalances (VFI). Federal-regional transfers serve to equalize the marginal cost of public funds between regions hit by different shocks. The optimal vertical fiscal gap minimizes the efficiency cost of taxation in the federation as a whole. The analysis shows how the existence of vertical fiscal externalities, leading regional governments to overprovide public goods, can induce the federal government to create a VFI by selecting transfers that differ from the optimal fiscal gap. When the federal government can commit to its policies before regional governments select their level of expenditures, the VFI will generally be negative. In the absence of commitment, the equilibrium transfer is unambiguously larger than the optimal fiscal gap, resulting in a positive VFI. In an intertemporal setting, the VFI has implications for the sharing of debt between the federal and regional governments.

Download Info
To download:

If you experience problems downloading a file, check if you have the proper application to view it first. Information about this may be contained in the File-Format links below. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://www.econ.queensu.ca/working_papers/papers/qed_wp_1072.pdf
File Format: application/pdf
File Function: First version 2006
Download Restriction: no

Publisher Info
Paper provided by Queen's University, Department of Economics in its series Working Papers with number 1072.

Download reference. The following formats are available: HTML (with abstract), plain text (with abstract), BibTeX, RIS (EndNote, RefMan, ProCite), ReDIF
Length: 45 pages
Date of creation: Jan 2006
Date of revision:
Handle: RePEc:qed:wpaper:1072

Contact details of provider:
Postal: Kingston, Ontario, K7L 3N6
Phone: (613) 533-2250
Fax: (613) 533-6668
Email:
Web page: http://www.econ.queensu.ca/
More information through EDIRC

For technical questions regarding this item, or to correct its listing, contact: (Mark Babcock).

Related research
Keywords: vertical fiscal imbalance; federal-regional transfers; commitment; fiscal externalities;

Other versions of this item:

Find related papers by JEL classification:
H72 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Budget and Expenditures
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

This paper has been announced in the following NEP Reports:

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. 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. [Downloadable!] (restricted)
  2. David E. Wildasin, 2005. "Global Competition for Mobile Resources: Implications for Equity, Efficiency, and Political Economy," Working Papers 2005-08, University of Kentucky, Institute for Federalism and Intergovernmental Relations. [Downloadable!]
    Other versions:
  3. Johnson, William R, 1988. "Income Redistribution in a Federal System," American Economic Review, American Economic Association, vol. 78(3), pages 570-73, June. [Downloadable!] (restricted)
  4. Janos Kornai & Eric Maskin & Gerard Roland, 2003. "Understanding the Soft Budget Constraint," Journal of Economic Literature, American Economic Association, vol. 41(4), pages 1095-1136, December.
    Other versions:
  5. BOADWAY, Robin & MARCHAND, Maurice & VIGNEAULT, Marianne, 1998. "The consequences of overlapping tax bases for redistribution and public spending in a federation," CORE Discussion Papers 1998003, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    Other versions:
  6. Jean Hindriks & Benjamin Lockwood, 2005. "Decentralization and Electoral Accountability: Incentives, Separation, and Voter Welfare," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
    Other versions:
  7. Richard M Bird & Andrey V Tarasov, 2004. "Closing the gap: fiscal imbalances and intergovernmental transfers in developed federations," Environment and Planning C: Government and Policy, Pion Ltd, London, vol. 22(1), pages 77-102, February. [Downloadable!] (restricted)
    Other versions:
  8. Buettner, Thiess & Wildasin, David E., 2006. "The dynamics of municipal fiscal adjustment," Journal of Public Economics, Elsevier, vol. 90(6-7), pages 1115-1132, August. [Downloadable!] (restricted)
    Other versions:
  9. Boadway, R & Keen, M, 1996. "Efficiency and the optimal direction of federal-state transfers," IFS Working Papers W96/01, Institute for Fiscal Studies.
    Other versions:
  10. Bucovetsky, Sam & Smart, Michael, 2002. "The Efficiency Consequences of Local Revenue Equalization: Tax Competition and Tax Distortions," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
    Other versions:
  11. Clifford J. Carrubba & Matthew Gabel, 2005. "Do Governments Sway European Court of Justice Decision-making?: Evidence from Government Court Briefs," Working Papers 2005-06, University of Kentucky, Institute for Federalism and Intergovernmental Relations. [Downloadable!]
  12. Michael J. Keen & Christos Kotsogiannis, 2002. "Does Federalism Lead to Excessively High Taxes?," American Economic Review, American Economic Association, vol. 92(1), pages 363-370, March. [Downloadable!]
  13. Clifford J. Carrubba & Matthew Gabel & Lacey Murrah & Ryan Clough & Elizabeth Montgomery & Rebecca Schambach, 2005. "National Party Politics and Supranational Politics in the European Union: New Evidence from the European Parliament," Working Papers 2005-04, University of Kentucky, Institute for Federalism and Intergovernmental Relations. [Downloadable!]
  14. Walter Hettich & Stanley L. Winer, 1986. "Vertical Imbalance in the Fiscal Systems of Federal States," Canadian Journal of Economics, Canadian Economics Association, vol. 19(4), pages 745-65, November. [Downloadable!] (restricted)
  15. Michael Keen, 1997. "Vertical Tax Externalities in the Theory of Fiscal Federalism," IMF Working Papers 97/173, International Monetary Fund.
    Other versions:
  16. Matthew Gabel & Kenneth Scheve, 2005. "Estimating the Effect of Elite Communications on Public Opinion Using Instrumental Variables," Working Papers 2005-02, University of Kentucky, Institute for Federalism and Intergovernmental Relations. [Downloadable!]
  17. Michael Smart, 1998. "Taxation and Deadweight Loss in a System of Intergovernmental Transfers," Canadian Journal of Economics, Canadian Economics Association, vol. 31(1), pages 189-206, February.
  18. Lockwood, Ben, 1999. "Inter-regional insurance," Journal of Public Economics, Elsevier, vol. 72(1), pages 1-37, April. [Downloadable!] (restricted)
  19. William Hoyt, 2005. "The Assignment and Division of the Tax Base in a System of Hierarchical Governments," Working Papers 2005-07, University of Kentucky, Institute for Federalism and Intergovernmental Relations. [Downloadable!]
  20. David E. Wildasin, 2005. "Fiscal Competition," Working Papers 2005-05, University of Kentucky, Institute for Federalism and Intergovernmental Relations. [Downloadable!]
  21. B. Dahlby & L. S. Wilson, 1994. "Fiscal Capacity, Tax Effort, and Optimal Equalization Grants," Canadian Journal of Economics, Canadian Economics Association, vol. 27(3), pages 657-72, August. [Downloadable!] (restricted)
  22. Robin Boadway & Motohiro Sato, 2006. "Bureaucratic Advice and Political Governance," Working Papers 2006-03, University of Kentucky, Institute for Federalism and Intergovernmental Relations. [Downloadable!]
    Other versions:
  23. Persson, Torsten & Tabellini, Guido, 1996. "Federal Fiscal Constitutions: Risk Sharing and Redistribution," Journal of Political Economy, University of Chicago Press, vol. 104(5), pages 979-1009, October. [Downloadable!] (restricted)
  24. William H. Hoyt & J. William Harden, 2005. "MSA Location and the Impact of State Taxes on Employment and Population: A Comparison of Border and Interior MSA's," Working Papers 2005-01, University of Kentucky, Institute for Federalism and Intergovernmental Relations. [Downloadable!]
  25. Masayoshi Hayashi & Robin Boadway, 2001. "An empirical analysis of intergovernmental tax interaction: the case of business income taxes in Canada," Canadian Journal of Economics, Canadian Economics Association, vol. 34(2), pages 481-503, May. [Downloadable!] (restricted)
  26. Poterba, James M, 1994. "State Responses to Fiscal Crises: The Effects of Budgetary Institutions and Politics," Journal of Political Economy, University of Chicago Press, vol. 102(4), pages 799-821, August. [Downloadable!] (restricted)
    Other versions:
  27. David E. Wildasin, 2004. "The Institutions of Federalism: Toward an Analytical Framework," Public Economics 0403006, EconWPA. [Downloadable!]
  28. Bev Dahlby, 1996. "Fiscal externalities and the design of intergovernmental grants," International Tax and Public Finance, Springer, vol. 3(3), pages 397-412, July. [Downloadable!] (restricted)
  29. Massimo Bordignon & Paolo Manasse & Guido Tabellini, 2001. "Optimal Regional Redistribution under Asymmetric Information," American Economic Review, American Economic Association, vol. 91(3), pages 709-723, June. [Downloadable!] (restricted)
    Other versions:
  30. Kothenburger, Marko, 2004. "Tax competition in a fiscal union with decentralized leadership," Journal of Urban Economics, Elsevier, vol. 55(3), pages 498-513, May. [Downloadable!] (restricted)
    Other versions:
  31. James Marton & David E. Wildasin, 2006. "State Government Cash and In-kind Benefits: Intergovernmental Fiscal Transfers and Cross-Program Substitution," Working Papers 2006-01, University of Kentucky, Institute for Federalism and Intergovernmental Relations. [Downloadable!]
    Other versions:
  32. Robin Boadway & Jean-Francois Tremblay, 2006. "A Theory of Vertical Fiscal Imbalance," Working Papers 1072, Queen's University, Department of Economics. [Downloadable!]
    Other versions:
Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Hikaru Ogawa & David Wildasin, 2007. "Think Locally, Act Locally: Spillovers, Spillbacks, and Efficient Decentralized Policymaking," Working Papers 2007-06, University of Kentucky, Institute for Federalism and Intergovernmental Relations. [Downloadable!]
    Other versions:
  2. Toshihiro Ihori, 2008. "Overlapping Tax Revenue, Local Debt Control and Soft-Budget Constraint," CIRJE F-Series CIRJE-F-552, CIRJE, Faculty of Economics, University of Tokyo. [Downloadable!]
  3. Christos Kotsogiannis & Robert Schwager, 2006. "Fiscal Equalization and Yardstick Competition," Working Papers 2006-15, University of Kentucky, Institute for Federalism and Intergovernmental Relations. [Downloadable!]
    Other versions:
  4. David Wildasin, 2007. "Pre-Emption: Federal Statutory Intervention in State Taxation," Working Papers 2007-05, University of Kentucky, Institute for Federalism and Intergovernmental Relations. [Downloadable!]
  5. Marko Köthenbürger, 2006. "Ex-Post Redistribution in a Federation: Implications for Corrective Policy," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
    Other versions:
  6. Marko Koethenbuerger, 2007. "Federal Tax-Transfer Policy and Intergovernmental Pre-Commitment," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
    Other versions:
  7. Robin Boadway & Jean-Francois Tremblay, 2005. "A Theory of Vertical Fiscal Imbalance," Working Papers 2006-04, University of Kentucky, Institute for Federalism and Intergovernmental Relations. [Downloadable!]
    Other versions:
Statistics
Access and download statistics

Did you know? Over five million full texts a year are downloaded through IDEAS.

This page was last updated on 2009-12-3.

This information is provided to you by IDEAS at the Department of Economics, College of Liberal Arts and Sciences, University of Connecticut using RePEc data on a server sponsored by the Society for Economic Dynamics.