Competitive Federalism: A Political-Economy General Equilibrium Approach
This paper develops a modelling framework within which questions of fiscal federalism can be handled. Regional computable general equilibrium (CGE) models form one good approach for examining such questions. However, conventional regional CGE models contain little, if any, theory relating to optimal economic decision-making by governments. In this paper we overcome this limitation by analysing a simple two-region GE model to which maximising behaviour by regional governments is added. We call this a regional political-economy general equilibrium (PEGE) model. We begin by considering a model with only regional governments. We then introduce a rudimentary federal government and consider two cases; in the first the federal government carries out a lump-sum transfer of resources from one regional government to another and in the second it imposes lump-sum income taxes on households and uses this revenue to make transfers to regional governments. We compare the implications of the PEGE model with and without the federal government transfers and conclude that optimising regional governments change their own tax rates to offset the effects on their citizens of the federal government action.
|Date of creation:||2001|
|Date of revision:|
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- Morgan, William & Mutti, John & Rickman, Dan, 1996. "Tax Exporting, Regional Economic Growth, and Welfare," Journal of Urban Economics, Elsevier, vol. 39(2), pages 131-159, March.
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- Robin Boadway & Michael Keen, 1996.
"Efficiency and the optimal direction of federal-state transfers,"
International Tax and Public Finance,
Springer, vol. 3(2), pages 137-155, May.
- Boadway, R & Keen, M, 1996. "Efficiency and the optimal direction of federal-state transfers," IFS Working Papers W96/01, Institute for Fiscal Studies.
- Hoyt William H., 1993. "Tax Competition, Nash Equilibria, and Residential Mobility," Journal of Urban Economics, Elsevier, vol. 34(3), pages 358-379, November.
- Dixon, Peter B & Madden, John R & Peter, Matthew W, 1993. "The Effects of Reallocating General Revenue Assistance among the Australian States," The Economic Record, The Economic Society of Australia, vol. 69(207), pages 367-81, December.
- Laussel, Didier & Le Breton, Michel, 1998. "Existence of Nash equilibria in fiscal competition models," Regional Science and Urban Economics, Elsevier, vol. 28(3), pages 283-296, May.
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