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Fiscal Equalization and Yardstick Competition

  • Christos Kotsogiannis

    ()

    (Department of Economics, School of Business and Economics, University of Exeter, Streatham Court, Rennes Drive, Exeter EX4 4PU, England, UK)

  • Robert Schwager

    (Georg-August-Universität Göttingen and Zentrum für Europäische Wirtschaftsforschung, Mannheim, Platz der Göttinger Sieben 3, D-37073 Göttingen)

A multi-jurisdictional system is thought to improve, through yardstick competition, accountability. At the same time equalization programs, a common feature of multijurisdictional systems, are thought to be a prerequisite for both efficiency of the internal market and the equity objective of the equal treatment of equals. This paper shows that such programs, by reducing the information context of comparisons across jurisdictions, introduce perverse fiscal incentives and thus reduce accountability. The consequence of this is that equilibrium rent-taking increases with the intensity of equalization transfers.

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Paper provided by University of Kentucky, Institute for Federalism and Intergovernmental Relations in its series Working Papers with number 2006-15.

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Length: 24 pages
Date of creation: Nov 2006
Date of revision:
Handle: RePEc:ifr:wpaper:2006-15
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