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Voluntary Matching Grants Can Forestall Social Dumping

  • Jacques H. Drèze
  • Charles Figuières
  • Jean Hindriks

The European economic integration leads to increasing mobility of factors, thereby threatening the stability of social transfer programs. This paper investigates the possibility to achieve by means of voluntary matching grants both the optimal allocation of factors and the optimal level of redistribution in the presence of factor mobility. We use a fiscal competition model a la Wildasin (1991) in which states differ in their technologies and preferences for redistribution. We first investigate a simple process in which the regulatory authority progressively raises the matching grants to the district choosing the lowest transfer and all districts respond optimally to the resulting change in transfers all around. This process is shown to increase total production and the level of redistribution. However it does not guarantee that all districts gain, nor that an efficient level of redistribution is attained. Assuming complete information among districts, we first derive the willingness of each district to match the contribution of other districts and we show that the aggregate willingness to pay for matching rates converges to zero when both the efficient level of redistribution and the efficient allocation of factors are achieved. We then describe the adjustment process for the matching rates that will lead districts to the efficient outcome and guarantee that everyone will gain.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 1867.

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Date of creation: 2006
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Handle: RePEc:ces:ceswps:_1867
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  1. FIGUIÈRES, Charles & HINDRIKS, Jean, 2001. "Matching grants and Ricardian equivalence," CORE Discussion Papers 2001048, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  2. Wildasin, David E, 1991. "Income Redistribution in a Common Labor Market," American Economic Review, American Economic Association, vol. 81(4), pages 757-74, September.
  3. HINDRIKS, Jean & MYLES, Gareth D., 2001. "Strategic inter-regional transfers," CORE Discussion Papers 2001004, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  4. Dreze, J.H. & Greenberg, J., . "Hedonic coalitions: optimality and stability," CORE Discussion Papers RP -403, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  5. Hans-Werner Sinn, 2001. "The New Systems Competition," CESifo Working Paper Series 623, CESifo Group Munich.
  6. Roberts, John, 1979. "Incentives in Planning Procedures for the Provision of Public Goods," Review of Economic Studies, Wiley Blackwell, vol. 46(2), pages 283-92, April.
  7. Hindriks, J., 1998. "Tax versus Transfer Competition," Discussion Papers 9808, Exeter University, Department of Economics.
  8. Guttman, Joel M, 1978. "Understanding Collective Action: Matching Behavior," American Economic Review, American Economic Association, vol. 68(2), pages 251-55, May.
  9. Wildasin, David E., 1988. "Nash equilibria in models of fiscal competition," Journal of Public Economics, Elsevier, vol. 35(2), pages 229-240, March.
  10. Andreas Pfingsten & Andreas Wagener, 1997. "Centralized vs. Decentralized Redistribution: A Case for Interregional Transfer Mechanisms," International Tax and Public Finance, Springer, vol. 4(4), pages 429-451, November.
  11. Sinn, Hans-Werner, 1990. "Tax harmonization and tax competition in Europe," Munich Reprints in Economics 19846, University of Munich, Department of Economics.
  12. Malinvaud, Edmond, 1972. "Prices for Individual Consumption, Quantity Indicators for Collective Consumption," Review of Economic Studies, Wiley Blackwell, vol. 39(4), pages 385-405, October.
  13. FIGUIÈRES, Charles & HINDRIKS, Jean & MYLES, Gareth D., . "Revenue sharing versus expenditure sharing in a federal system," CORE Discussion Papers RP -1683, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  14. David E. Wildasin, 2000. "Factor Mobility and Fiscal Policy in the EU: Policy Issues and Analytical Approaches," CESifo Working Paper Series 344, CESifo Group Munich.
  15. Varian, Hal R, 1994. "A Solution to the Problem of Externalities When Agents Are Well-Informed," American Economic Review, American Economic Association, vol. 84(5), pages 1278-93, December.
  16. Kevin Roberts, 1999. "Dynamic voting in clubs," LSE Research Online Documents on Economics 19349, London School of Economics and Political Science, LSE Library.
  17. Charles Brown & Wallace E. Oates, 1985. "Assistance to the Poor in a Federal System," NBER Working Papers 1715, National Bureau of Economic Research, Inc.
  18. Jan K. Brueckner, 1999. "Welfare Reform and the Race to the Bottom: Theory and Evidence," Southern Economic Journal, Southern Economic Association, vol. 66(2), pages 505-525, January.
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