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Vertical externalities revisited: new results with public inputs and unit taxation

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  • Diego Martínez

Abstract

This paper studies the provision of public inputs in a federal system with unit taxation on labor. We use a model with vertical tax and expenditure externalities to analyze the e¢ ciency of equilibria under di¤erent settings, particularly Nash and Stackelberg equilibria. Our results discuss some ?ndings from the previous literature. First, both vertical externalities are interrelated each other. Second, the condition for production e¢ ciency in the public sector becomes irrelevant to assess optimality. And third, the replication of the second-best outcome by the federal government behaving as Stackelberg leader crucially depends on the states?reaction function.

Suggested Citation

  • Diego Martínez, 2014. "Vertical externalities revisited: new results with public inputs and unit taxation," Working Papers. Collection A: Public economics, governance and decentralization 1403, Universidade de Vigo, GEN - Governance and Economics research Network.
  • Handle: RePEc:gov:wpaper:1403
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    More about this item

    Keywords

    Fiscal federalism; vertical externality; productive public spending.;
    All these keywords.

    JEL classification:

    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • H4 - Public Economics - - Publicly Provided Goods
    • H7 - Public Economics - - State and Local Government; Intergovernmental Relations

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