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Sharing Budgetary Austerity under Free Mobility and Asymmetric Information: An Optimal Regulation Approach to Fiscal Federalism


  • Marie-Laure Breuillé
  • Robert J. Gary-Bobo


In the present article, Tiebout meets Laffont and Tirole in the land of Fiscal Federalism. We use a non-trivial Principal-Multi-Agent model to characterize the optimal intergovernmental grant schedule, when the cost of local public goods depends on hidden characteristics and actions of local governments, and under citizen free mobility. We show that local governments earn informational rents, and how optimal local taxes, public good production levels and land prices are jointly distorted at the second-best optimum, as a consequence of free mobility and asymmetric information. The effect of informational asymmetries is to decrease the average production of public goods and to increase the inter-jurisdictional variance of taxes and public-good production.

Suggested Citation

  • Marie-Laure Breuillé & Robert J. Gary-Bobo, 2005. "Sharing Budgetary Austerity under Free Mobility and Asymmetric Information: An Optimal Regulation Approach to Fiscal Federalism," CESifo Working Paper Series 1559, CESifo Group Munich.
  • Handle: RePEc:ces:ceswps:_1559

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    References listed on IDEAS

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    Cited by:

    1. Bönke, Timm & Jochimsen, Beate & Schröder, Carsten, 2014. "Fiscal federalism and tax enforcement," Annual Conference 2014 (Hamburg): Evidence-based Economic Policy 100394, Verein für Socialpolitik / German Economic Association.
    2. Anton Bondarev & Beat Hintermann & Frank C. Krysiak & Ralph Winkler, 2017. "The Intricacy of Adapting to Climate Change: Flood Protection as a Local Public Goods Game," CESifo Working Paper Series 6382, CESifo Group Munich.
    3. Huber, Bernd & Runkel, Marco, 2008. "Interregional redistribution and budget institutions under asymmetric information," Journal of Public Economics, Elsevier, vol. 92(12), pages 2350-2361, December.
    4. Kai Konrad & Stergios Skaperdas, 2012. "The market for protection and the origin of the state," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 50(2), pages 417-443, June.
    5. Rosella Levaggi, 2008. "Decentralisation vs fiscal federalism in the presence of impure public goods," Working Papers 0812, University of Brescia, Department of Economics.
    6. Bönke, Timm & Jochimsen, Beate & Schröder, Carsten, 2011. "Fiscal equalization and regions' (un)willingness-to-tax: Evidence from Germany," Economics Working Papers 2011-06, Christian-Albrechts-University of Kiel, Department of Economics.
    7. Nicolas Gravel & Michel Poitevin, 2014. "Should a Non-Rival Public Good Always Be Provided Centrally?," Working Papers halshs-01063191, HAL.
    8. Herold, Katharina, 2009. "Intergovernmental grants and financial autonomy under asymmetric information," FiFo Discussion Papers - Finanzwissenschaftliche Diskussionsbeiträge 09-2, University of Cologne, FiFo Institute for Public Economics.
    9. Geys, Benny & Konrad, Kai A., . "Federalism and optimal allocation across levels of governance," Chapters in Economics, University of Munich, Department of Economics.
    10. repec:rom:rampas:v:2015:y:2015:i:25:p:6-26 is not listed on IDEAS
    11. Linda Toolsema & Maarten Allers, 2014. "Welfare Financing: Grant Allocation and Efficiency," De Economist, Springer, vol. 162(2), pages 147-166, June.
    12. repec:dgr:rugsom:12004-eef is not listed on IDEAS
    13. Toolsema-Veldman, Linda & Allers, M.A., 2012. "Welfare financing," Research Report 12004-EEF, University of Groningen, Research Institute SOM (Systems, Organisations and Management).
    14. Timm Bönke & Beate Jochimsen & Carsten Schröder, 2013. "Fiscal Federalism and Tax Administration: Evidence from Germany," Discussion Papers of DIW Berlin 1307, DIW Berlin, German Institute for Economic Research.

    More about this item


    asymmetric information; Principal-Agent model; public budget deficits; free-mobility equilibrium; fiscal federalism;

    JEL classification:

    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • H70 - Public Economics - - State and Local Government; Intergovernmental Relations - - - General

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