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Federalism, Freedom of Movement, and Fiscal Equalization


  • Traub, Stefan


In this paper, we take up the question why a group of sovereign countries is willing to form a federation even if residents of the high-income region suspect potential immigrants to be net beneficiaries of the tax and transfer system. We argue that income uncertainty alone cannot satisfactorily explain the formation of federations, since in many existing and developing federations income differences are both large and persistent. In the model presented here remaining separated involves costs for the high-income region, which can be regarded as a proxy for the efficiency loss caused if mobile factors cannot reallocate. A fiscal equalization scheme that shares the resources saved by limiting costly migration between the regions can make both regions better off.

Suggested Citation

  • Traub, Stefan, 2003. "Federalism, Freedom of Movement, and Fiscal Equalization," Economics Working Papers 2003-06, Christian-Albrechts-University of Kiel, Department of Economics.
  • Handle: RePEc:zbw:cauewp:788

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    References listed on IDEAS

    1. Alesina, Alberto & Perotti, Roberto, 1998. "Economic Risk and Political Risk in Fiscal Unions," Economic Journal, Royal Economic Society, vol. 108(449), pages 989-1008, July.
    2. Flatters, Frank & Henderson, Vernon & Mieszkowski, Peter, 1974. "Public goods, efficiency, and regional fiscal equalization," Journal of Public Economics, Elsevier, vol. 3(2), pages 99-112, May.
    3. Buchanan, James M. & Goetz, Charles J., 1972. "Efficiency limits of fiscal mobility: An assessment of the tiebout model," Journal of Public Economics, Elsevier, vol. 1(1), pages 25-43, April.
    4. Andreas Pfingsten & Andreas Wagener, 1997. "Centralized vs. Decentralized Redistribution: A Case for Interregional Transfer Mechanisms," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 4(4), pages 429-451, November.
    5. Ladd, Helen F. & Yinger, John, 1994. "The Case for Equalizing Aid," National Tax Journal, National Tax Association, vol. 47(1), pages 211-224, March.
    6. David E. Wildasin, 1994. "Income Redistribution and Migration," Canadian Journal of Economics, Canadian Economics Association, vol. 27(3), pages 637-656, August.
    7. Persson, Torsten & Tabellini, Guido, 1996. "Federal Fiscal Constitutions: Risk Sharing and Redistribution," Journal of Political Economy, University of Chicago Press, vol. 104(5), pages 979-1009, October.
    8. Ladd, Helen F. & Yinger, John, 1994. "The Case for Equalizing Aid," National Tax Journal, National Tax Association, vol. 47(1), pages 211-24, March.
    9. Wildasin, David E, 1991. "Income Redistribution in a Common Labor Market," American Economic Review, American Economic Association, vol. 81(4), pages 757-774, September.
    10. Eichengreen, Barry, 1993. "European Monetary Unification," Journal of Economic Literature, American Economic Association, vol. 31(3), pages 1321-1357, September.
    11. Wallace E. Oates, 1968. "The Theory of Public Finance in a Federal System," Canadian Journal of Economics, Canadian Economics Association, vol. 1(1), pages 37-54, February.
    12. Bucovetsky, Sam, 1998. "Federalism, equalization and risk aversion," Journal of Public Economics, Elsevier, vol. 67(3), pages 301-328, March.
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    More about this item


    Federalism; Migration; Fiscal Equalization;

    JEL classification:

    • D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement
    • H40 - Public Economics - - Publicly Provided Goods - - - General
    • H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism
    • D78 - Microeconomics - - Analysis of Collective Decision-Making - - - Positive Analysis of Policy Formulation and Implementation


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