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Income redistribution in an economic union : the trade off between inter- and intranational redistribution

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  • CREMER, Helmuth

    (GREMAQ and IDEI, Université de Toulouse)

  • PESTIEAU, Pierre

    () (CREPP, Université de Liège and Center for Operations Research and Econometrics (CORE), Université catholique de Louvain (UCL), Louvain la Neuve, Belgium)

Abstract

This paper studies the design of redistributive policies between and within the member countries of an economic union. There are two types of countries, which differ in their proportion of high income individuals. Both the supra-national and the national governments attempt to redistribute income within their respective boundaries. However, the central government cannot observe an individual country's ability to pay; it only observes the aggregate (internal) redistributive effort of each country. We derive the optimal incentive compatible tax-transfer policy of the central government and show that there is a tradeoff between inter- and intranational redistribution. Specifically, to reduce informational rents of the rich countries, the optimal policy induces a distortion in the poor countries'(internal) redistributive policies. Interestingly, both insufficient as well as excessive redistribution can arise.

Suggested Citation

  • CREMER, Helmuth & PESTIEAU, Pierre, 1996. "Income redistribution in an economic union : the trade off between inter- and intranational redistribution," CORE Discussion Papers 1996053, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  • Handle: RePEc:cor:louvco:1996053
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    File URL: https://uclouvain.be/en/research-institutes/immaq/core/dp-1996.html
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    References listed on IDEAS

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    1. Bucovetsky, S. & Marchand, M. & Pestieau, P., 1998. "Tax Competition and Revelation of Preferences for Public Expenditure," Journal of Urban Economics, Elsevier, pages 367-390.
    2. Horst Raff & John Wilson, 1997. "Income Redistribution with Well-Informed Local Governments," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 4(4), pages 407-427, November.
    3. Helmuth Cremer & Maurice Marchand & Pierre Pestieau, 1996. "Interregional redistribution through tax surcharge," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 3(2), pages 157-173, May.
    4. Massimo Bordignon & Paolo Manasse & Guido Tabellini, 2001. "Optimal Regional Redistribution under Asymmetric Information," American Economic Review, American Economic Association, vol. 91(3), pages 709-723, June.
    5. Picard Pierre & Gilbert G, 1991. "Incentives and the optimal size of local territories," CEPREMAP Working Papers (Couverture Orange) 9124, CEPREMAP.
    6. Cremer, Helmuth & Pestieau, Pierre, 1996. "Distributive implications of European integration," European Economic Review, Elsevier, pages 747-757.
    7. Stiglitz, Joseph E., 1982. "Self-selection and Pareto efficient taxation," Journal of Public Economics, Elsevier, vol. 17(2), pages 213-240, March.
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    Cited by:

    1. GRECO, Luciano, 2003. "Optimal grants under asymmetric information: federalism versus devolution," CORE Discussion Papers 2003024, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    2. Cornes, Richard C. & Silva, Emilson C. D., 2000. "Local Public Goods, Risk Sharing, and Private Information in Federal Systems," Journal of Urban Economics, Elsevier, vol. 47(1), pages 39-60, January.
    3. Kolmar, Martin, 2002. "Income redistribution in an economic union: Does asymmetric information legitimize centralization?," Discussion Papers, Series I 317, University of Konstanz, Department of Economics.
    4. Martin Kolmar, 2002. "An Analysis of Institutional Change in the European Union with an Application to Social Policy," Discussion Papers of DIW Berlin 282, DIW Berlin, German Institute for Economic Research.
    5. Martin Besfamille & Jean-Marie Lozachmeur, 2010. "NIMBY and mechanism design under different constitutional constraints," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 17(2), pages 114-132, April.
    6. Feld, Lars P, 2000. "Tax Competition and Income Redistribution: An Empirical Analysis for Switzerland," Public Choice, Springer, vol. 105(1-2), pages 125-164, October.
    7. Pestieau, Pierre, 1996. "Politique sociale, redistribution et intégration économique," L'Actualité Economique, Société Canadienne de Science Economique, vol. 72(3), pages 275-289, septembre.
    8. Cremer, Helmuth & Pestieau, Pierre, 2002. "Factor Mobility and Redistribution: A Survey," IDEI Working Papers 154, Institut d'Économie Industrielle (IDEI), Toulouse, revised 2003.
    9. Horst Raff & John Wilson, 1997. "Income Redistribution with Well-Informed Local Governments," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 4(4), pages 407-427, November.
    10. Martin Kolmar, 2003. "An Analysis of Institutional Change in the European Union," European Journal of Law and Economics, Springer, vol. 16(3), pages 303-326, November.
    11. Sören Blomquist & Luca Micheletto, 2009. "Nonlinear Income Taxation And Matching Grants In A Federation With Decentralized In-Kind Transfers," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 50(2), pages 543-575, May.

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