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Interregional Redistribution and Budget Institutions under Asymmetric Information

  • Bernd Huber
  • Marco Runkel

Empirical evidence from the U.S. and the European Union suggests that regions which contribute to interregional redistribution face weaker borrowing constraints than regions which benefit from interregional redistribution. This paper presents an argument in favor of such differentiated budgetary institutions. It develops a two-period model of a federation consisting of two types of regions. The federal government redistributes from one type of regions (contributors) to the other type (recipients). It is shown that a fiscal constitution with lax budget rules for contributors and strict budget rules for recipients solves the self-selection problem the federal government faces in the presence of asymmetric information regarding exogenous characteristics of the regions.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 1491.

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Date of creation: 2005
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Handle: RePEc:ces:ceswps:_1491
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