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Matching Grants and Ricardian Equivalence

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  • Charles Figuieres

    (CORE)

  • Jean Hindriks

    (Queen Mary, University of London)

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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Bibliographic Info

Paper provided by Queen Mary, University of London, School of Economics and Finance 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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Keywords: Fiscal federalism; Ricardian equivalence; Matching grants;

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References

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  1. Robin Boadway & Pierre Pestieau & David Wildasin, 1987. "Tax-Transfer Policies and the Voluntary Provision of Public Goods," Working Papers, Queen's University, Department of Economics 682, Queen's University, Department of Economics.
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  3. Barro, Robert J., 1974. "Are Government Bonds Net Wealth?," Scholarly Articles 3451399, Harvard University Department of Economics.
  4. Wildasin, David E., 1999. "Factor mobility and fiscal policy in the EU: policy issues and analytical approaches," ZEW Discussion Papers 99-35, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  5. repec:fth:louvco:0104 is not listed on IDEAS
  6. Wildasin, David E., 1988. "Nash equilibria in models of fiscal competition," Journal of Public Economics, Elsevier, vol. 35(2), pages 229-240, March.
  7. Charles Brown & Wallace E. Oates, 1985. "Assistance to the Poor in a Federal System," NBER Working Papers 1715, National Bureau of Economic Research, Inc.
  8. Milleron, Jean-Claude, 1972. "Theory of value with public goods: A survey article," Journal of Economic Theory, Elsevier, vol. 5(3), pages 419-477, December.
  9. Lockwood, Ben, 1997. "Inter-Regional Insurance," Discussion Papers 9703, Exeter University, Department of Economics.
  10. Jan K. Brueckner, 1999. "Welfare Reform and the Race to the Bottom: Theory and Evidence," Southern Economic Journal, Southern Economic Association, vol. 66(2), pages 505-525, January.
  11. Andreas Pfingsten & Andreas Wagener, 1997. "Centralized vs. Decentralized Redistribution: A Case for Interregional Transfer Mechanisms," International Tax and Public Finance, Springer, Springer, vol. 4(4), pages 429-451, November.
  12. Wildasin, David E, 1991. "Income Redistribution in a Common Labor Market," American Economic Review, American Economic Association, vol. 81(4), pages 757-74, September.
  13. Hindriks, J., 1998. "Tax versus Transfer Competition," Discussion Papers 9808, Exeter University, Department of Economics.
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Cited by:
  1. Bloch, Francis & Zenginobuz, E. Unal, 2006. "Tiebout equilibria in local public good economies with spillovers," Journal of Public Economics, Elsevier, vol. 90(8-9), pages 1745-1763, September.
  2. Jacques H. Drèze & Charles Figuières & Jean Hindriks, 2006. "Voluntary Matching Grants Can Forestall Social Dumping," CESifo Working Paper Series 1867, CESifo Group Munich.
  3. Robert Fenge & Volker Meier, 2006. "Subsidies for Wages and Infrastructure: How to Restrain Undesired Immigration," CESifo Working Paper Series 1741, CESifo Group Munich.
  4. Hikaru Ogawa, 2006. "Tax competition, spillovers, and subsidies," The Annals of Regional Science, Springer, Springer, vol. 40(4), pages 849-858, December.

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