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Fiscal Equalization and Yardstick Competition

  • Christos Kotsogiannis
  • Robert Schwager

A multi-jurisdictional system is thought to improve, through yardstick competition, accountability. At the same time equalization programs, a common feature of multi-jurisdictional systems, are thought to be a prerequisite for both efficiency of the internal market and the equity objective of the equal treatment of equals. This paper shows that such programs, by reducing the information context of comparisons across jurisdictions, introduce perverse fiscal incentives and thus reduce accountability. The consequence of this is that equilibrium rent-taking increases with the intensity of equalization transfers.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 1865.

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Date of creation: 2006
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Handle: RePEc:ces:ceswps:_1865
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