The Political Economy of Equalization Transfers

Normative theories of fiscal federalism postulate that intergovernmental transfers should be determined by equity and efficiency considerations, to support local governments in providing differentiated public goods to heterogeneous populations, while ensuring an even distribution of basic services across all regions (Musgrave, 1959, 1983; Oates, 1972; Gramlich, 1977). However, a recent surge of empirical evidence shows that variations in intergovernmental transfers to sub-national jurisdictions within countries cannot be explained by traditional concerns of equity and efficiency alone, and that political variables representing electoral incentives of public agents are additional and significant determinants.