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Competitive Federalism: A Political-Economy General Equilibrium Approach

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Author Info
Nicolaas Groenewold (Department of Economics, The University of Western Australia)
Alfred J. Hagger
John R. Madden

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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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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
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Handle: RePEc:uwa:wpaper:01-10

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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. 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.
  2. 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. [Downloadable!] (restricted)
  3. Wildasin, David E., 1988. "Nash equilibria in models of fiscal competition," Journal of Public Economics, Elsevier, vol. 35(2), pages 229-240, March. [Downloadable!] (restricted)
  4. 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. [Downloadable!] (restricted)
  5. Hoyt William H., 1993. "Tax Competition, Nash Equilibria, and Residential Mobility," Journal of Urban Economics, Elsevier, vol. 34(3), pages 358-379, November. [Downloadable!] (restricted)
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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. 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. [Downloadable!]
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