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A political economy model of the vertical fiscal gap and vertical fiscal imbalances in a federation

  • Bev Dahlby

    ()

    (University of Calgary)

  • Jonathan Rodden

    ()

    (Stanford University)

We develop a political economy model of intergovernmental transfers. Vertical fiscal balance occurs in a federation when the ratio of the marginal benefit of the public services provided by the federal and provincial governments is equal to their relative marginal costs of production. With majority voting in national elections, the residents of a "pivotal province" will determine the level of transfers such that the residents of that province achieve a vertical fiscal balance in spending by the two levels of government. We test the predictions of the model using Canadian time series data and cross-section data for nine federations.

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Paper provided by Institut d'Economia de Barcelona (IEB) in its series Working Papers with number 2013/18.

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Length: 46 pages
Date of creation: 2013
Date of revision:
Handle: RePEc:ieb:wpaper:2013/6/doc2013-18
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  1. Gary S. Becker & Casey B. Mulligan, 1998. "Deadweight Costs and the Size of Government," NBER Working Papers 6789, National Bureau of Economic Research, Inc.
  2. CASAMATTA, Georges & CREMER, Helmuth & PESTIEAU, Pierre, . "Political sustainability and the design of social insurance," CORE Discussion Papers RP 1449, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  3. Craig Volden, 2007. "Intergovernmental Grants: A Formal Model of Interrelated National and Subnational Political Decisions," Publius: The Journal of Federalism, Oxford University Press, vol. 37(2), pages 209-243, Spring.
  4. Boadway, Robin & Tremblay, Jean-François, 2010. "Mobility And Fiscal Imbalance," National Tax Journal, National Tax Association, vol. 63(4), pages 1023-53, December.
  5. Dixit, Avinash & Londregan, John, 1998. "Fiscal federalism and redistributive politics," Journal of Public Economics, Elsevier, vol. 68(2), pages 153-180, May.
  6. Robin Boadway & Jean-Francois Tremblay, 2005. "A Theory of Vertical Fiscal Imbalance," Working Papers 2006-04, University of Kentucky, Institute for Federalism and Intergovernmental Relations.
  7. Tiberiu Dragu & Jonathan Rodden, 2010. "Representation and regional redistribution in federations," Working Papers 2010/16, Institut d'Economia de Barcelona (IEB).
  8. Robin Boadway & Jean-François Tremblay, 2006. "A Theory of Fiscal Imbalance," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 62(1), pages 1-27, March.
  9. Pereira, Paulo T C, 1996. " A Politico-economic Approach to Intergovernmental Lump-Sum Grants," Public Choice, Springer, vol. 88(1-2), pages 185-201, July.
  10. Tracy Snoddon & Jean-François Wen, 2003. "Grants structure in an intergovernmental fiscal game," Economics of Governance, Springer, vol. 4(2), pages 115-126, 08.
  11. Crémer, Jacques & Palfrey, Thomas, 2000. "Federal Mandates by Popular Demand," IDEI Working Papers 120, Institut d'Économie Industrielle (IDEI), Toulouse, revised 2001.
  12. CREMER, Helmuth & DE DONDER, Philippe & MALDONADO, Dario & PESTIEAU, Pierre, 2006. "Voting over type and generosity of a pension system when some individuals are myopic," CORE Discussion Papers 2006079, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  13. Sharma, Chanchal Kumar, 2010. "Beyond Gaps and Imbalances: Re-Structuring the Debate on Intergovernmental Fiscal Relations," MPRA Paper 32145, University Library of Munich, Germany.
  14. Alberto Porto & Pablo Sanguinetti, 2001. "Political Determinants of Intergovernmental Grants: Evidence From Argentina," Economics and Politics, Wiley Blackwell, vol. 13(3), pages 237-256, November.
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