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Ex-Post Redistribution in a Federation: Implications for Corrective Policy

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  • Marko Köthenbürger

Abstract

This paper analyzes whether changes in the timing of equalizing transfers to state governments necessitate an adjustment in federal corrective policy. According to the existing literature (assuming an ex-ante choice of transfers), the corrective grant is equal to the marginal damage/benefit inflicted by externality generation. When the federal government accommodates state finances ex-post, the grant differs in formula from existing prescription. Allocative federal policy corrects state policy incentives twofold. It entails a correction for the distortion in the marginal benefit of state spending (as in earlier literature) and for the distortion in the marginal cost of public funds induced by the ex-post provision of transfers. The required grant rule is generically disproportionate to the equilibrium externality (even with lump-sum taxation). Furthermore, the ex-post provision of transfers is critical for the nature of the equilibrium inefficiency. Equalizing transfers at least partly internalize consumption spill-overs, but simultaneously establishes a new source of inefficiency. As a final result, the existing prescription for allocative federal policy continues to apply if the public good is pure.

Suggested Citation

  • Marko Köthenbürger, 2006. "Ex-Post Redistribution in a Federation: Implications for Corrective Policy," CESifo Working Paper Series 1754, CESifo Group Munich.
  • Handle: RePEc:ces:ceswps:_1754
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    More about this item

    Keywords

    federalism; externality; corrective grant; equalization; commitment;

    JEL classification:

    • D62 - Microeconomics - - Welfare Economics - - - Externalities
    • H10 - Public Economics - - Structure and Scope of Government - - - General
    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General
    • H70 - Public Economics - - State and Local Government; Intergovernmental Relations - - - General

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