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Decentralization with porous borders: public production in a federation with tax competition and spillovers

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  • Stephanie Armbruster

    (Faculty of Business and Economics, University of Basel)

  • Beat Hintermann

    (Faculty of Business and Economics, University of Basel)

Abstract

We analyze the strategic interaction of regional and federal governments using a model that includes fiscal externalities in the form of inter-regional capital tax competition and technical externalities in the form of inter-regional spillovers. The federal government aims to correct for these inefficiencies using a transfer system. If the regional governments are policy leaders (such that federal policy is set conditional on regional choices), they will internalize both fiscal and technical externalities but free-ride on the transfer system. Efficiency can be achieved by introducing a second transfer scheme that is independent of regional public production. If the federal government sets its policy first and can commit itself to it, the outcome is efficient only if matching grants are used that are financed outside of the transfer system.

Suggested Citation

  • Stephanie Armbruster & Beat Hintermann, 2020. "Decentralization with porous borders: public production in a federation with tax competition and spillovers," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 27(3), pages 606-642, June.
  • Handle: RePEc:kap:itaxpf:v:27:y:2020:i:3:d:10.1007_s10797-019-09572-7
    DOI: 10.1007/s10797-019-09572-7
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    More about this item

    Keywords

    Fiscal federalism; Tax competition; Externalities; Spillovers; Commitment; Centralized leadership; Decentralized leadership;
    All these keywords.

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H40 - Public Economics - - Publicly Provided Goods - - - General
    • H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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