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Voluntary matching grants can forestall social dumping

  • DREZE, Jacques H.
  • FIGUIERES, Charles
  • HINDRIKS, Jean

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 reditribution. 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 ajustment 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 Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) in its series CORE Discussion Papers with number 2006111.

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Date of creation: 00 Dec 2006
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Handle: RePEc:cor:louvco:2006111
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  1. Wildasin, David E, 1991. "Income Redistribution in a Common Labor Market," American Economic Review, American Economic Association, vol. 81(4), pages 757-74, September.
  2. Figuieres, Charles & Hindriks, Jean, 2002. "Matching grants and Ricardian equivalence," Journal of Urban Economics, Elsevier, vol. 52(1), pages 177-191, July.
  3. Sinn, Hans-Werner, 1990. "Tax harmonization and tax competition in Europe," European Economic Review, Elsevier, vol. 34(2-3), pages 489-504, May.
  4. Wildasin, David E., 1999. "Factor mobility and fiscal policy in the EU: policy issues and analytical approaches," ZEW Discussion Papers 99-35, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  5. Kevin Roberts, 1999. "Dynamic Voting in Clubs," STICERD - Theoretical Economics Paper Series 367, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
  6. John Roberts, 1977. "Incentives in Planning Procedures for the Provision of Public Goods," Discussion Papers 264, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  7. 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.
  8. 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.
  9. Hans-Werner Sinn, 2004. "The New Systems Competition," Perspektiven der Wirtschaftspolitik, Verein für Socialpolitik, vol. 5(1), pages 23-38, 02.
  10. 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.
  11. Jean Hindriks & Gareth D. Myles, 2003. "Strategic Inter-Regional Transfers," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 5(2), pages 229-248, 04.
  12. Charles Figuieres & Jean Hindriks & Gareth D. Myles, 2004. "Revenue Sharing versus Expenditure Sharing in a Federal System," International Tax and Public Finance, Springer, vol. 11(2), pages 155-174, 03.
  13. 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.
  14. Brown, Charles C. & Oates, Wallace E., 1987. "Assistance to the poor in a federal system," Journal of Public Economics, Elsevier, vol. 32(3), pages 307-330, April.
  15. Hindriks, J., 1998. "Tax versus Transfer Competition," Discussion Papers 9808, Exeter University, Department of Economics.
  16. Wildasin, David E., 1988. "Nash equilibria in models of fiscal competition," Journal of Public Economics, Elsevier, vol. 35(2), pages 229-240, March.
  17. Dreze, J H & Greenberg, J, 1980. "Hedonic Coalitions: Optimality and Stability," Econometrica, Econometric Society, vol. 48(4), pages 987-1003, May.
  18. Guttman, Joel M, 1978. "Understanding Collective Action: Matching Behavior," American Economic Review, American Economic Association, vol. 68(2), pages 251-55, May.
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