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Equalization Transfers, Fiscal Decentralization, and Economic Growth


  • Hikaru Ogawa
  • Sayaka Yakita


This paper analyzes the fiscal decentralization and equalization transfers in a two-region model of endogenous growth. In our model, two levels of government with different objectives are considered: the local governments maximize the utility of the residents of the region, and the central government makes the equalization transfers to close the gaps in fiscal capacity among the regions and pays attention to the economic growth rate. Our first result demonstrates that the preferred tax rate chosen by the local government is positively affected by the magnitude of fiscal decentralization. The second result shows that the fiscal equalization policies of the central government have no influence on the speed of interregional growth convergence. Furthermore, the normative implication is obtained from our final results that there exists an optimal degree of fiscal decentralization to reach the central government´s goal of growth maximization, but the magnitude of fiscal decentralization chosen by the central government is excessive to entail the highest regional welfare.

Suggested Citation

  • Hikaru Ogawa & Sayaka Yakita, 2009. "Equalization Transfers, Fiscal Decentralization, and Economic Growth," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 65(1), pages 122-140, March.
  • Handle: RePEc:mhr:finarc:sici:0015-2218(200903)65:1_122:etfdae_2.0.tx_2-q
    DOI: 10.1628/001522108X444198

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    References listed on IDEAS

    1. Gerking, Shelby & Stanley, Linda R, 1986. "An Economic Analysis of Air Pollution and Health: The Case of St. Louis," The Review of Economics and Statistics, MIT Press, vol. 68(1), pages 115-121, February.
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    3. de Bovenberg, A Lans & Mooij, Ruud A, 1994. "Environmental Levies and Distortionary Taxation," American Economic Review, American Economic Association, vol. 84(4), pages 1085-1089, September.
    4. A. Bovenberg, 1999. "Green Tax Reforms and the Double Dividend: an Updated Reader's Guide," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 6(3), pages 421-443, August.
    5. Bovenberg, A.L. & Goulder, L.H., 1996. "Optimal environmental taxation in the presence of other taxes : General equilibrium analyses," Other publications TiSEM 5d4b7517-c5c8-4ef6-ab76-3, Tilburg University, School of Economics and Management.
    6. Pio Baake & Rainald Borck & Andreas L–ffler, 2004. "Complexity and Progressivity in Income Tax Design: Deductions for Work-Related Expenses," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 11(3), pages 299-312, May.
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    Cited by:

    1. Pierre Salmon, 2013. "Decentralization and growth: what if the cross-jurisdiction approach had met a dead end?," Constitutional Political Economy, Springer, vol. 24(2), pages 87-107, June.
    2. Chan, Felix & Petchey, Jeff, 2017. "A note on the relation between fiscal equalization and economic growth," MPRA Paper 79156, University Library of Munich, Germany.

    More about this item


    equalization transfers; fiscal decentralization; economic growth; convergence;

    JEL classification:

    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
    • H5 - Public Economics - - National Government Expenditures and Related Policies
    • H7 - Public Economics - - State and Local Government; Intergovernmental Relations
    • R5 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Regional Government Analysis


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