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Efficient Revenue Sharing and Upper-Level Governments: Theory and Application to Germany

  • Thiess Buettner
  • Robert Schwager
  • Sebastian Hauptmeier

This paper explores conditions under which revenue-sharing grants will achieve efficiency. We develop a general formulation of the state's decision problem of implementing a set of local policies. A theoretical analysis shows that if the state government pursues own policies and cannot levy lump-sum contributions from local jurisdictions, it will implement revenue-sharing grants that induce local governments to raise local tax rates. A subsequent empirical analysis of local tax policy in Germany suggests that attempts by state-level governments to extract fiscal resources from local governments result in higher tax rates at the local level.

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Article provided by Mohr Siebeck, Tübingen in its journal Journal of Institutional and Theoretical Economics.

Volume (Year): 167 (2011)
Issue (Month): 4 (December)
Pages: 647-667

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Handle: RePEc:mhr:jinste:urn:sici:0932-4569(201112)167:4_647:ersaug_2.0.tx_2-5
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