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Insurance and Incentive Effects of Transfers among Regions: Equity and Efficiency

  • S. Bucovetsky

    ()

When productivity shocks across regions are less-than-perfectlycorrelated, there are gains from federation, even if the regionsare identical ex ante. For the federation to provide insurancefor these productivity shocks, it must introduce some sort of“equalizing” transfer programme among regions. But any suchtransfer programme induces a form of moral hazard as well, ifregions still have some control over their own policies. Oneof the implications of this moral hazard is that the progressivityof the overall (regional together with federal) tax system willbe increased when the federal transfer programme is expanded. Copyright Kluwer Academic Publishers 1997

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File URL: http://hdl.handle.net/10.1023/A:1008660931233
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Article provided by Springer in its journal International Tax and Public Finance.

Volume (Year): 4 (1997)
Issue (Month): 4 (November)
Pages: 463-483

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Handle: RePEc:kap:itaxpf:v:4:y:1997:i:4:p:463-483
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  1. Wildasin, David E. & Wilson, John Douglas, 1998. "Risky local tax bases: risk-pooling vs. rent-capture," Journal of Public Economics, Elsevier, vol. 69(2), pages 229-247, June.
  2. P. Asdrubali & Bent E. S�rensen & Oved Yosha, 1995. "Channels of Interstate Risksharing : US 1963-1990," Working Papers 95-13, Brown University, Department of Economics.
  3. Johnson, William R, 1988. "Income Redistribution in a Federal System," American Economic Review, American Economic Association, vol. 78(3), pages 570-73, June.
  4. Alberto Alesina & Roberto Perotti, 1995. "Economic Risk and Political Risk in Fiscal Unions," NBER Working Papers 4992, National Bureau of Economic Research, Inc.
  5. Besley, Timothy & Coate, Stephen, 1997. "An Economic Model of Representative Democracy," The Quarterly Journal of Economics, MIT Press, vol. 112(1), pages 85-114, February.
  6. Michael Smart, 1996. "Taxation incentives and deadweight loss in a system of intergovernmental transfers," Working Papers msmart-96-03, University of Toronto, Department of Economics.
  7. Persson, Torsten & Tabellini, Guido, 1996. "Federal Fiscal Constitutions: Risk Sharing and Moral Hazard," Econometrica, Econometric Society, vol. 64(3), pages 623-46, May.
  8. Osborne, Martin J & Slivinski, Al, 1996. "A Model of Political Competition with Citizen-Candidates," The Quarterly Journal of Economics, MIT Press, vol. 111(1), pages 65-96, February.
  9. Grandmont, Jean-Michel, 1978. "Intermediate Preferences and the Majority Rule," Econometrica, Econometric Society, vol. 46(2), pages 317-30, March.
  10. Bucovetsky, Sam, 1991. "Choosing tax rates and public expenditure levels using majority rule," Journal of Public Economics, Elsevier, vol. 46(1), pages 113-131, October.
  11. Wildasin, David E, 1991. "Income Redistribution in a Common Labor Market," American Economic Review, American Economic Association, vol. 81(4), pages 757-74, September.
  12. Rogoff, Kenneth, 1985. "The Optimal Degree of Commitment to an Intermediate Monetary Target," The Quarterly Journal of Economics, MIT Press, vol. 100(4), pages 1169-89, November.
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