IDEAS home Printed from
MyIDEAS: Login to save this article or follow this journal

Ex-post redistribution in a federation: Implications for corrective policy

  • Kothenburger, Marko

This paper analyzes whether changes in the timing of equalizing transfers to state governments necessitate an adjustment in federal corrective policy. According to the existing literature (assuming an ex-ante choice of transfers), the corrective grant is equal to the marginal damage/benefit inflicted by externality generation. When the federal government accommodates state finances ex-post, the grant differs in formula from existing prescription. Allocative federal policy corrects state policy incentives twofold. It entails a correction for the distortion in the marginal benefit of state spending (as in earlier literature) and for the distortion in the marginal cost of public funds induced by the ex-post provision of transfers. The required grant rule is generically disproportionate to the equilibrium externality (even with lump-sum taxation). Furthermore, the ex-post provision of transfers is critical for the nature of the equilibrium inefficiency. Equalizing transfers at least partly internalize consumption spill-overs, but simultaneously establishes a new source of inefficiency. As a final result, the existing prescription for allocative federal policy continues to apply if the public good is pure.

(This abstract was borrowed from another version of this item.)

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL:
Download Restriction: Full text for ScienceDirect subscribers only

As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

Article provided by Elsevier in its journal Journal of Public Economics.

Volume (Year): 91 (2007)
Issue (Month): 3-4 (April)
Pages: 481-496

in new window

Handle: RePEc:eee:pubeco:v:91:y:2007:i:3-4:p:481-496
Contact details of provider: Web page:

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.:

as in new window
  1. Dillen, Mats & Lundholm, Michael, 1996. "Dynamic income taxation, redistribution, and the ratchet effect," Journal of Public Economics, Elsevier, vol. 59(1), pages 69-93, January.
  2. Boadway,Robin & Pestieau,Pierre & Wildasin,David, 1986. "Tax-transfer policies and the voluntary provision of public goods," Discussion Paper Serie A 130, University of Bonn, Germany.
  3. Robin Boadway & Jean-Francois Tremblay, 2005. "A Theory of Vertical Fiscal Imbalance," Working Papers 2006-04, University of Kentucky, Institute for Federalism and Intergovernmental Relations.
  4. Thiess Buettner & David E. Wildasin, 2002. "The Dynamics of Municipal Fiscal Adjustment," CESifo Working Paper Series 649, CESifo Group Munich.
  5. R. Boadway & K. Cuff & M. Marchand, 2001. "Equalization and the Decentralization of Revenue-Raising in a Federation," Department of Economics Working Papers 2001-04, McMaster University.
  6. Marko Koethenbuerger, 2003. "Tax Competition in a Fiscal Union with Decentralized Leadership," CESifo Working Paper Series 943, CESifo Group Munich.
  7. J. Kornai & E. Maskin & G. Roland., 2004. "Understanding the Soft Budget Constraint," VOPROSY ECONOMIKI, N.P. Redaktsiya zhurnala "Voprosy Economiki", vol. 11.
  8. Timothy Goodspeed, 2002. "Bailouts in a Federation," International Tax and Public Finance, Springer, vol. 9(4), pages 409-421, August.
  9. Per Krusell & Burhanettin Kuruşçu & Anthony A. Smith Jr., 2010. "Temptation and Taxation," Econometrica, Econometric Society, vol. 78(6), pages 2063-2084, November.
  10. Barnett, A H, 1980. "The Pigouvian Tax Rule under Monopoly," American Economic Review, American Economic Association, vol. 70(5), pages 1037-41, December.
  11. Mitsui, Kiyoshi & Sato, Motohiro, 2001. "Ex ante free mobility, ex post immobility, and time consistency in a federal system," Journal of Public Economics, Elsevier, vol. 82(3), pages 445-460, December.
  12. Marko Köthenbürger, 2002. "Tax Competition and Fiscal Equalization," International Tax and Public Finance, Springer, vol. 9(4), pages 391-408, August.
  13. Nobuo Akai & Toshihiro Ihori, 2002. "Central government subsidies to local public goods," Economics of Governance, Springer, vol. 3(3), pages 227-239, November.
  14. Yingyi, Qian & Roland, Gerard, 1996. "The soft budget constraint in China," Japan and the World Economy, Elsevier, vol. 8(2), pages 207-223, June.
  15. Cremer, Helmuth & Gahvari, Firouz & Ladoux, Norbert, 1998. "Externalities and optimal taxation," Journal of Public Economics, Elsevier, vol. 70(3), pages 343-364, December.
  16. Boadway, R & Keen, M, 1996. "Efficiency and the optimal direction of federal-state transfers," IFS Working Papers W96/01, Institute for Fiscal Studies.
  17. Bev Dahlby, 1996. "Fiscal externalities and the design of intergovernmental grants," International Tax and Public Finance, Springer, vol. 3(3), pages 397-412, July.
  18. Ekaterina Zhuravskaya, 2000. "Incentives to provide local public goods: fiscal federalism, Russian style," Working Papers w0001, Center for Economic and Financial Research (CEFIR).
  19. Caplan, Arthur J. & Cornes, Richard C. & Silva, Emilson C. D., 2000. "Pure public goods and income redistribution in a federation with decentralized leadership and imperfect labor mobility," Journal of Public Economics, Elsevier, vol. 77(2), pages 265-284, August.
  20. David E. Wildasin, 2001. "Externalities and Bailouts: Hard and Soft Budget Constraints in Intergovernmental Fiscal Relations," Public Economics 0112002, EconWPA.
  21. Gordon, Roger H, 1983. "An Optimal Taxation Approach to Fiscal Federalism," The Quarterly Journal of Economics, MIT Press, vol. 98(4), pages 567-86, November.
  22. Alan J. Auerbach & James R. Hines Jr., 2001. "Taxation and Economic Efficiency," NBER Working Papers 8181, National Bureau of Economic Research, Inc.
  23. Bovenberg, A. L. & van der Ploeg, F., 1994. "Environmental policy, public finance and the labour market in a second-best world," Journal of Public Economics, Elsevier, vol. 55(3), pages 349-390, November.
  24. 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.
  25. Bordignon, Massimo & Manasse, Paolo & Tabellini, Guido, 1996. "Optimal Regional Redistribution Under Asymmetric Information," CEPR Discussion Papers 1437, C.E.P.R. Discussion Papers.
  26. Robin W. Boadway & Frank R. Flatters, 1982. "Efficiency and Equalization Payments in a Federal System of Government: A Synthesis and Extension of Recent Results," Canadian Journal of Economics, Canadian Economics Association, vol. 15(4), pages 613-33, November.
  27. Pettersson-Lidbom, Per & Dahlberg, Matz, 2003. "An Empirical Approach for Evaluating Soft Budget Constraints," Working Paper Series 2003:28, Uppsala University, Department of Economics.
  28. Nobuo Akai & Motohiro Sato, 2005. "leadership meets soft budget," CIRJE F-Series CIRJE-F-391, CIRJE, Faculty of Economics, University of Tokyo.
  29. Yingyi Qian & Gerard Roland, . "Federalism and the Soft Budget Constraint," Working Papers 97045, Stanford University, Department of Economics.
  30. Pierre-Andre Chiappori & Ivan Werning, 2002. "Comment on "Rotten Kids, Purity, and Perfection"," Journal of Political Economy, University of Chicago Press, vol. 110(2), pages 475-504, April.
  31. Freixas, Xavier & Guesnerie, Roger & Tirole, Jean, 1985. "Planning under Incomplete Information and the Ratchet Effect," Review of Economic Studies, Wiley Blackwell, vol. 52(2), pages 173-91, April.
  32. Bernheim, B Douglas, 1986. "On the Voluntary and Involuntary Provision of Public Goods," American Economic Review, American Economic Association, vol. 76(4), pages 789-93, September.
  33. Warr, Peter G., 1983. "The private provision of a public good is independent of the distribution of income," Economics Letters, Elsevier, vol. 13(2-3), pages 207-211.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:eee:pubeco:v:91:y:2007:i:3-4:p:481-496. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.