In this paper we derive the equilibrium level of redistribution from one mobile factor (say, the rich or capital) to another possible mobile factor (say, the poor or labour) when regions choose both their inter-regional transfers and redistributive policies non-cooperatively. We find that inter-regional transfers are always desirable (to mitigate the fiscal competition) but cannot be sustained (as a Nash equilibrium) when chosen simultaneously with the redistributive policy. On the other hand, if regions can negotiate inter-regional transfers before setting their redistributive policy, the strategic effect of inter-regional transfers makes them sustainable. However there are also equilibria with partial or no inter-regional transfers at all. The effects of regional asymmetries are analyzed. Interestingly enough, evidence suggests that predictions of our model accord very closely with the pattern of transfers in the EU across member states.
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Paper provided by Queen Mary, University of London, Department of Economics in its series Working Papers with number
417.
Find related papers by JEL classification: C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games D62 - Microeconomics - - Welfare Economics - - - Externalities H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism R50 - Urban, Rural, and Regional Economics - - Regional Government Analysis - - - General
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