Nicolaas Groenewold () (Department of Economics, The University of Western Australia) Alfred J Hagger (School of Economics, University of Tasmania)
Abstract
This paper is concerned primarily with the economic and welfare consequences of federal redistributive grants. We use a model which has two regions, each with households, firms and regional governments as well as a federal government. The households, firms and regional governments are all optimizers – households maximize utility, firms maximize profits and we assume that regional governments are empire-builders in that they choose their expenditure and tax levels so as to maximise total expenditure – the size of their empire. Labour is free to move between regions in response to utility differences and does so until such differences have been eliminated. Inter-regional migration, interregional trade flows and federal government redistribution are the main sources of interconnectedness between the two regions. The model is linearised in log-differences and simulated using a calibration based on Australian state-level data. We find that the welfare effect of intergovernmental transfers is trivial but that all other variables of interest change substantially – consumption, employment, prices, taxes, wages, output and government expenditure. Finally, the signs of the effects of a federal transfer are not affected by the empire-building behaviour of regional governments although the magnitude of the effects is generally dampened.
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Publisher Info
Paper provided by The University of Western Australia, Department of Economics in its series Economics Discussion / Working Papers with number
05-04.
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