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A Theoretical Rationale for the Fiscal-Gap Model of Equalization Transfers

Author

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  • Jorge Martinez-Vazquez
  • Cristian Sepulveda

Abstract

This paper develops a formal framework to explain the rationale of the model of the fiscal gap (the difference between a jurisdiction's expenditure needs and fiscal capacity), arguably the most popular model used by countries globally, recommended by applied economists for equalization transfer program design. The framework addresses the problem of accountability and follows a normative approach to derive the conventional fiscal-gap formula and the optimal conditions for its implementation. We conclude that the fiscal-gap model of equalization, which relies only on estimates of expenditure needs and fiscal capacity, is sufficient to efficiently allocate available funds across jurisdictions.

Suggested Citation

  • Jorge Martinez-Vazquez & Cristian Sepulveda, 2020. "A Theoretical Rationale for the Fiscal-Gap Model of Equalization Transfers," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 76(1), pages 1-28.
    • Handle: RePEc:mhr:finarc:urn:doi:10.1628/fa-2019-0019
    DOI: 10.1628/fa-2019-0019
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    Cited by:

    1. Manuel E. Lago & Santiago Lago-Penas & Jorge Martinez-Vazquez & Cristian Sepulveda, 2026. "Revenue Decentralization and Vertical Fiscal Imbalance: A Survey," International Center for Public Policy Working Paper Series, at AYSPS, GSU paper2617, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.

    More about this item

    Keywords

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    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H40 - Public Economics - - Publicly Provided Goods - - - General
    • H71 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Taxation, Subsidies, and Revenue

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