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Matching Grants and Ricardian Equivalence

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Author Info
Charles Figuieres (CORE)
Jean Hindriks (Queen Mary, University of London)

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Abstract

This paper questions the effectiveness of matching grants to correct for interjurisdictional spillovers in the light of Bernheim general neutrality result. Indeed this result suggests that the usual argument that matching grants are needed to internalize the externality arising from the existence of interjuridictional spillovers is an artifact of the assumption that jurisdictions neglect the impact that their decisions have on the federal budget. Relaxing this assumption and using a classical model where the arbitrage resulting from labor mobility implies that redistribution has the properties of a public good, we find that matching grants are relevant although much less effective. We also find that optimal matching rates are independent of the jurisdictions' choice of policy variable contrarily to the case where jurisdictions ignore the impact of their decisions on the federal budget.

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File URL: http://www.econ.qmul.ac.uk/papers/doc/wp440.pdf
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Publisher Info
Paper provided by Queen Mary, University of London, Department of Economics in its series Working Papers with number 440.

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Date of creation: Oct 2001
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Handle: RePEc:qmw:qmwecw:wp440

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Related research
Keywords: Fiscal federalism Ricardian equivalence Matching grants

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Find related papers by JEL classification:
H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
H70 - Public Economics - - State and Local Government; Intergovernmental Relations - - - General

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  1. Robert Fenge & Volker Meier, 2006. "Subsidies for Wages and Infrastructure: How to Restrain Undesired Immigration," CESifo Working Paper Series CESifo Working Paper No. , CESifo GmbH. [Downloadable!]
  2. Jacques H. DREZE & Charles FIGUIERES & Jean, HINDRIKS, 2006. "Vountary matching grants can forestall social dumping," Université catholique de Louvain, Département des Sciences Economiques Working Paper 2006063, Université catholique de Louvain, Département des Sciences Economiques. [Downloadable!]
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  3. Hikaru Ogawa, 2006. "Tax competition, spillovers, and subsidies," The Annals of Regional Science, Springer, vol. 40(4), pages 849-858, December. [Downloadable!] (restricted)
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