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Competitive Federalism: A Political-Economy General Equilibrium Approach

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  • Nicolaas Groenewold

    (Department of Economics, The University of Western Australia)

  • Alfred J. Hagger
  • John R. Madden

Abstract

This paper develops a modelling framework within which questions of fiscal federalism can be handled. Regional computable general equilibrium (CGE) models form one good approach for examining such questions. However, conventional regional CGE models contain little, if any, theory relating to optimal economic decision-making by governments. In this paper we overcome this limitation by analysing a simple two-region GE model to which maximising behaviour by regional governments is added. We call this a regional political-economy general equilibrium (PEGE) model. We begin by considering a model with only regional governments. We then introduce a rudimentary federal government and consider two cases; in the first the federal government carries out a lump-sum transfer of resources from one regional government to another and in the second it imposes lump-sum income taxes on households and uses this revenue to make transfers to regional governments. We compare the implications of the PEGE model with and without the federal government transfers and conclude that optimising regional governments change their own tax rates to offset the effects on their citizens of the federal government action.

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File URL: http://ecompapers.biz.uwa.edu.au/paper/PDF%20of%20Discussion%20Papers/2001/01-10.pdf
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Bibliographic Info

Paper provided by The University of Western Australia, Department of Economics in its series Economics Discussion / Working Papers with number 01-10.

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Length: 19 pages
Date of creation: 2001
Date of revision:
Handle: RePEc:uwa:wpaper:01-10

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  1. Morgan, William & Mutti, John & Rickman, Dan, 1996. "Tax Exporting, Regional Economic Growth, and Welfare," Journal of Urban Economics, Elsevier, vol. 39(2), pages 131-159, March.
  2. Dixon, Peter B & Madden, John R & Peter, Matthew W, 1993. "The Effects of Reallocating General Revenue Assistance among the Australian States," The Economic Record, The Economic Society of Australia, vol. 69(207), pages 367-81, December.
  3. Robin Boadway and Michael Keen, . "Efficiency and the Optimal Direction of Federal-State Transfers," Economics Discussion Papers 445, University of Essex, Department of Economics.
  4. WILDASIN, David, . "Nash equilibria in models of fiscal competition," CORE Discussion Papers RP -804, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  5. Laussel, Didier & Le Breton, Michel, 1998. "Existence of Nash equilibria in fiscal competition models," Regional Science and Urban Economics, Elsevier, vol. 28(3), pages 283-296, May.
  6. Hoyt William H., 1993. "Tax Competition, Nash Equilibria, and Residential Mobility," Journal of Urban Economics, Elsevier, vol. 34(3), pages 358-379, November.
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Citations

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Cited by:
  1. Lecca, Patrizio & McGregor, Peter G. & Swales, J. Kim, 2010. "Balanced Budget Government Spending in a Small Open Regional Economy," SIRE Discussion Papers 2010-68, Scottish Institute for Research in Economics (SIRE).
  2. Anping Chen & Nicolaas Groenewold, 2012. "The Regional Economic Effects of a Reduction in Carbon Emissions and An Evaluation of Offsetting Policies in China," Economics Discussion / Working Papers 12-14, The University of Western Australia, Department of Economics.
  3. Nicolaas Groenewold & Alfred Hagger, 2007. "Regional Unemployment Disparities: An Evaluation of Policy Measures," Economics Discussion / Working Papers 07-05, The University of Western Australia, Department of Economics.
  4. Davies, James B., 2004. "Microsimulation, CGE and Macro Modelling for Transition and Developing Economies," Working Paper Series UNU-WIDER Research Paper , World Institute for Development Economic Research (UNU-WIDER).
  5. James B Davies, 2009. "Combining microsimulation with CGE and macro modelling for distributional analysis in developing and transition countries," International Journal of Microsimulation, Interational Microsimulation Association, vol. 2(1), pages 49-56.
  6. Anping Chen & Nicolaas Groenewold, 2011. "The National and Regional Effects of Fiscal Decentralisation in China," Economics Discussion / Working Papers 11-18, The University of Western Australia, Department of Economics.
  7. Nicolaas Groenewold & Alfred Hagger, 2007. "The effects of fiscal equalisation in a model with endogenous regional governments: an analysis in a two-region numerical model," The Annals of Regional Science, Springer, vol. 41(2), pages 353-374, June.
  8. Anping Chen & Nicolaas Groenewold, 2009. "Regional Equality and National Development in China: Is There a Trade-Off?," Economics Discussion / Working Papers 09-21, The University of Western Australia, Department of Economics.

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