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Fiscal Equalisation and the Soft Budget Constraint

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Author Info
Plachta, Robert
Abstract

This paper assesses the interactions of horizontal fiscal equalisation schemes with debt policy by sovereign regional governments. Local public goods are either financed by debt or taxation. A horizontal equalisation scheme eleviates regional public revenue disparities under horizontal and vertical tax competition. We show that fiscal equalisation schemes have no impact on the optimal central government grant whereas they can either soften or harden the regional budget constraint depending on the specific formulae. Revenue equalisation softens the budget constraint whereas tax base equalisation hardens the budget constraint of poor states. --

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Paper provided by University of Cologne, CPE - Cologne Center for Public Economics in its series FiFo-CPE Discussion Papers - Finanzwissenschaftliche Diskussionsbeiträge with number 08-8.

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Date of creation: 2008
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Handle: RePEc:zbw:uoccpe:7451

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Related research
Keywords: Fiscal federalism; public debt; soft budget constraint; fiscal equalisation; tax competition;

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Find related papers by JEL classification:
H7 - Public Economics - - State and Local Government; Intergovernmental Relations
E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy

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  1. Qian, Yingyi & Roland, Gerard, 1998. "Federalism and the Soft Budget Constraint," American Economic Review, American Economic Association, vol. 88(5), pages 1143-62, December. [Downloadable!] (restricted)
    Other versions:
  2. Rodden, Jonathan, 2003. "Reviving Leviathan: Fiscal Federalism and the Growth of Government," International Organization, Cambridge University Press, vol. 57(04), pages 695-729, November. [Downloadable!]
  3. Breuille, Marie-Laure & Madies, Thierry & Taugourdeau, Emmanuelle, 2006. "Does tax competition soften regional budget constraint?," Economics Letters, Elsevier, vol. 90(2), pages 230-236, February. [Downloadable!] (restricted)
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  5. Huber, Bernd & Runkel, Marco, 2008. "Interregional redistribution and budget institutions under asymmetric information," Journal of Public Economics, Elsevier, vol. 92(12), pages 2350-2361, December. [Downloadable!] (restricted)
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  6. Sam Bucovetsky & Michael Smart, 2006. "The Efficiency Consequences of Local Revenue Equalization: Tax Competition and Tax Distortions," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 8(1), pages 119-144, 01. [Downloadable!] (restricted)
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  7. Kornai, J, 1979. "Resource-Constrained versus Demand-Constrained Systems," Econometrica, Econometric Society, vol. 47(4), pages 801-19, July. [Downloadable!] (restricted)
  8. Michael J. Keen & Christos Kotsogiannis, 2002. "Does Federalism Lead to Excessively High Taxes?," American Economic Review, American Economic Association, vol. 92(1), pages 363-370, March. [Downloadable!]
  9. Stähler, Nikolai, 2007. "Taxing deficits to restrain government spending and foster capital accumulation," Discussion Paper Series 1: Economic Studies 2007,26, Deutsche Bundesbank, Research Centre. [Downloadable!]
  10. Dr. Peter Kenning & Hilke Plassmann, 2004. "NeuroEconomics," Experimental 0412005, EconWPA. [Downloadable!]
  11. Zodrow, George R. & Mieszkowski, Peter, 1986. "Pigou, Tiebout, property taxation, and the underprovision of local public goods," Journal of Urban Economics, Elsevier, vol. 19(3), pages 356-370, May. [Downloadable!] (restricted)
  12. Wilson, John D., 1986. "A theory of interregional tax competition," Journal of Urban Economics, Elsevier, vol. 19(3), pages 296-315, May. [Downloadable!] (restricted)
  13. Marie-Laure Breuillé & Thierry Madiès & Emmanuelle Taugourdeau, 2007. "Funding source and soft budget constraint," EconomiX Working Papers 2007-12, University of Paris West - Nanterre la Défense, EconomiX. [Downloadable!]
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