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A Median Voter Model of the Vertical Fiscal Gap

  • Dahlby, Bev


    (University of Alberta, Department of Economics)

  • Rodden, Jonathan


    (Stanford University)

  • Wilson, Sam

    (University of Alberta, Department of Economics)

A median voter model is developed to explain the size of the vertical fiscal gap in a federation, i.e. the extent to which subnational governments' expenditures exceed their own-source tax revenues. In our model, individuals vote in subnational elections and in federal elections to determine tax rates and spending on public services by each level of government and transfers to the subnational governments. In the resulting political equilibrium, intergovernmental transfers from the central government are affected by the tax sensitivity of the tax bases of the central and subnational governments, the degree of inequality in the tax bases of the subnational governments, the allocation of spending responsibilities between the central and subnational governments, and whether the federal legislature is unicameral or bicameral.

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Paper provided by University of Alberta, Department of Economics in its series Working Papers with number 2009-14.

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Length: 45 pages
Date of creation: Jan 2009
Date of revision:
Handle: RePEc:ris:albaec:2009_014
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