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Fiscal Equalization and Yardstick Competition

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  • Christos Kotsogiannis
  • Robert Schwager

Abstract

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.

Suggested Citation

  • Christos Kotsogiannis & Robert Schwager, 2006. "Fiscal Equalization and Yardstick Competition," CESifo Working Paper Series 1865, CESifo.
    • Handle: RePEc:ces:ceswps:_1865
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    Cited by:

    1. Hikaru Ogawa & David E. Wildasin, 2009. "Think Locally, Act Locally: Spillovers, Spillbacks, and Efficient Decentralized Policymaking," American Economic Review, American Economic Association, vol. 99(4), pages 1206-1217, September.
    2. Kalb, Alexander, 2008. "The Impact of Intergovernmental Grants on Cost Efficiency: Theory and Evidence from German Municipalities," ZEW Discussion Papers 08-051, ZEW - Leibniz Centre for European Economic Research.
    3. Wildasin, David E., 2007. "Pre–Emption: Federal Statutory Intervention in State Taxation," National Tax Journal, National Tax Association;National Tax Journal, vol. 60(3), pages 649-662, September.
    4. Oto-Peralías, Daniel & Romero-Ávila, Diego & Usabiaga, Carlos, 2013. "Does fiscal decentralization mitigate the adverse effects of corruption on public deficits?," European Journal of Political Economy, Elsevier, vol. 32(C), pages 205-231.
    5. Kotsogiannis, Christos & Schwager, Robert, 2008. "Accountability and fiscal equalization," Journal of Public Economics, Elsevier, vol. 92(12), pages 2336-2349, December.
    6. Weingast, Barry R., 2009. "Second generation fiscal federalism: The implications of fiscal incentives," Journal of Urban Economics, Elsevier, vol. 65(3), pages 279-293, May.

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    More about this item

    Keywords

    equalization transfer programs; fiscal capacity; rent-seeking; fiscal federalism;
    All these keywords.

    JEL classification:

    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
    • H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism

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