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Gross versus net equalization scheme in a federation with decentralized leadership

Listed author(s):
  • Marie-Laure Breuillé

    (EconomiX - UPN - Université Paris Nanterre - CNRS - Centre National de la Recherche Scientifique)

  • Thierry Madies

    (Departement d'Economie Politique - Departement d'Economie Politique - Albert-Ludwigs-Universität Freiburg)

  • Emmanuelle Taugourdeau

    ()

    (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique)

This paper compares the impact of two equalization transfer schemes on regional budgetary choices: a gross equalization scheme, where ex-post transfers to regions are financed from federal tax revenues, and a net equalization scheme, where region-to-region ex-post transfers allocated by the federal government are self-financed. The net equalization scheme reduces ex-post federal intervention and should therefore be favored over the gross equalization scheme in order to reduce opportunistic regional behaviour. In addition, the two equalization schemes differently affect the composition of public expenditures. The gross equalization scheme generates an upward distortion of the amount of capital public expenditures whereas the net equalization scheme generates a downward distortion of the amount of current public expenditures compared to the optimum. A welfare analysis reveals that incentives to use a net equalization scheme are strengthened for a sufficiently high number of regions.

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Paper provided by HAL in its series Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) with number hal-00618721.

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Date of creation: 11 May 2010
Publication status: Published in Journal of Urban Economics, Elsevier, 2010, 68, pp.205-214
Handle: RePEc:hal:cesptp:hal-00618721
Note: View the original document on HAL open archive server: https://hal.archives-ouvertes.fr/hal-00618721
Contact details of provider: Web page: https://hal.archives-ouvertes.fr/

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