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Interregional Redistribution and Regional Disparities: How Equalization Does (Not) Work

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Listed author(s):
  • Kessler, Anke
  • Lessmann, Christian

Abstract

Do inter-governmental transfers such as equalization grants reduce interregional disparities? This paper studies both theoretically and empirically the impact of interregional redistribution on interregional inequality. We set up a model with residential choice and equalization grants between regions, and show that interregional transfer payments prevent convergence promoting migration. We test our model in using cross-country data and panel data for 22 highly developed OECD countries. The evidence suggests a positive relationship between interregional transfers and regional disparities both across countries and over time from 1982 to 2000. In the cross-section data, we find that countries with higher levels of interregional redistribution in the past show a subsequent increase in interregional disparity, while countries with lower levels of grants and transfers show less divergence or even convergence. The panel reveals a similar picture: countries who have increased their sub-governmental transfers and grants have experienced more divergence (less convergence) over time than countries who have lowered their transfers.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 8133.

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Date of creation: Dec 2010
Handle: RePEc:cpr:ceprdp:8133
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Keywords: Interregional Transfers; Redistribution Evidence; Regional Disparity;

Find related papers by JEL classification:

  • H71 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Taxation, Subsidies, and Revenue
  • H73 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Interjurisdictional Differentials and Their Effects
  • R58 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Regional Government Analysis - - - Regional Development Planning and Policy

References listed on IDEAS
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  1. Jeffrey B. Nugent & Makoto Yano, 1999. "Aid, Nontraded Goods, and the Transfer Paradox in Small Countries," American Economic Review, American Economic Association, vol. 89(3), pages 431-449, June.
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Cited by:

  1. Hansjörg Blöchliger & José Maria Pinero Campos, 2011. "Tax Competition Between Sub-Central Governments," OECD Economics Department Working Papers 872, OECD Publishing.
  2. Christian Lessmann, 2009. "Fiscal Decentralization and Regional Disparity: Evidence from Cross-Section and Panel Data," Environment and Planning A, , vol. 41(10), pages 2455-2473, October.
  3. Peter Schmidt, 2013. "The EU structural funds as a means to hamper migration," Review of Regional Research: Jahrbuch für Regionalwissenschaft, Springer;Gesellschaft für Regionalforschung (GfR), vol. 33(1), pages 73-99, February.

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