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Fiscal Externalities and Asymmetric Information in an Economic Federation

Author

Listed:
  • Aronsson, Thomas

    () (Department of Economics, Umeå University)

  • Wikström, Magnus

    () (Department of Economics, Umeå University)

Abstract

This paper analyzes optimal taxation and provision of public goods in an economy where tax and expenditure decisions are being made by both central and local governments. The main contribution of the paper is to address the implications of informational asymmetries, such that the central government cannot fully observe differences in local preferences. In case the differences across localities only refer to their preferences for local public goods, we show how the central government can implement the socially optimal resource allocation by means of subsidizing local provision of the federal (or central) public good. We also examine the welfare effects of such subsidies, when the socially optimal resource allocation is not a feasible policy option.

Suggested Citation

  • Aronsson, Thomas & Wikström, Magnus, 1999. "Fiscal Externalities and Asymmetric Information in an Economic Federation," Umeå Economic Studies 516, Umeå University, Department of Economics.
  • Handle: RePEc:hhs:umnees:0516
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    File URL: http://www.econ.umu.se/DownloadAsset.action?contentId=121148&languageId=3&assetKey=ues516
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    References listed on IDEAS

    as
    1. Longin, Francois M., 2000. "From value at risk to stress testing: The extreme value approach," Journal of Banking & Finance, Elsevier, vol. 24(7), pages 1097-1130, July.
    2. François Longin, 2001. "Extreme Correlation of International Equity Markets," Journal of Finance, American Finance Association, vol. 56(2), pages 649-676, April.
    3. Bystrom, Hans N. E., 2004. "Managing extreme risks in tranquil and volatile markets using conditional extreme value theory," International Review of Financial Analysis, Elsevier, vol. 13(2), pages 133-152.
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    Cited by:

    1. Linda Andersson & Thomas Aronsson & Magnus Wikstr–m, 2004. "Testing for Vertical Fiscal Externalities," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 11(3), pages 243-263, May.
    2. Aronsson, Thomas & Wikström, Magnus, 2001. "Optimal Taxation and Risk-Sharing Arrangements in an Economic Federation," Umeå Economic Studies 538, Umeå University, Department of Economics.

    More about this item

    Keywords

    Fiscal externalities; informational asymmetries: optimal taxation and provision of public goods;

    JEL classification:

    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
    • D62 - Microeconomics - - Welfare Economics - - - Externalities
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H71 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Taxation, Subsidies, and Revenue
    • H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism

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