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Federal tax-transfer policy and intergovernmental pre-commitment

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  • Koethenbuerger, Marko

Abstract

Federal and state governments often differ in the capacity to pre-commit to expenditure and tax policy. Whether the implied sequence of public decisions has any efficiency implications is the subject of this paper. We resort to a setting which contrary to most of the literature does not exhibit a perfect tax-base overlap. We show that a federal government's pre-commitment capacity is welfare-improving. Efficiency, however, does not improve over all decision margins. The welfare-increasing policy entails a more distorted level of public consumption. Moreover, welfare may also improve if local governments are able to pre-commit towards the upper level. The rationale is that although federal transfers are formally unconditional they nevertheless entail a tax-price effect; thereby potentially counteracting incentives to engage in a "race to the bottom" in fiscal competition among local governments.

Suggested Citation

  • Koethenbuerger, Marko, 2008. "Federal tax-transfer policy and intergovernmental pre-commitment," Regional Science and Urban Economics, Elsevier, vol. 38(1), pages 16-31, January.
  • Handle: RePEc:eee:regeco:v:38:y:2008:i:1:p:16-31
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    Cited by:

    1. Akai, Nobuo & Sato, Motohiro, 2008. "Too big or too small? A synthetic view of the commitment problem of interregional transfers," Journal of Urban Economics, Elsevier, vol. 64(3), pages 551-559, November.
    2. Sengupta, Bodhisatva, 2016. "Endogenous Leadership in a Federal Transfer Game," Working Papers 16/180, National Institute of Public Finance and Policy.
    3. repec:kap:itaxpf:v:24:y:2017:i:4:d:10.1007_s10797-017-9460-5 is not listed on IDEAS
    4. Elisabeth Gugl & Justin Leroux, 2015. "The Rotten Kid Theorem and Almost Transferable Utility," CESifo Working Paper Series 5642, CESifo Group Munich.
    5. Sebastian G. Kessing & Benny Schneider, 2014. "Regional Investment and Individual Redistribution in a Federation," Volkswirtschaftliche Diskussionsbeiträge 168-14, Universität Siegen, Fakultät Wirtschaftswissenschaften, Wirtschaftsinformatik und Wirtschaftsrecht.
    6. repec:dau:papers:123456789/6913 is not listed on IDEAS

    More about this item

    JEL classification:

    • H10 - Public Economics - - Structure and Scope of Government - - - General
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • H71 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Taxation, Subsidies, and Revenue

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