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How Much Fiscal Equalization? A Constitutional Approach

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  • Robert Fenge
  • Jakob von Weizsäcker

Abstract

We treat fiscal equalization between two states as an insurance device against regional tax revenue variations. This insurance comes at the price of a moral hazard: regional governments will spend too little effort fostering and exploiting their local tax base. We show that total fiscal equalization is desirable as a constitutional provision if states are allowed to negotiate less than total fiscal equalization later on with the constitution serving as the fallback position.

Suggested Citation

  • Robert Fenge & Jakob von Weizsäcker, 2001. "How Much Fiscal Equalization? A Constitutional Approach," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 157(4), pages 623-633, December.
    • Handle: RePEc:mhr:jinste:urn:sici:0932-4569(200112)157:4_623:hmfeac_2.0.tx_2-t
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    References listed on IDEAS

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    5. Bernd Huber & Christian Baretti & Karl Lichtblau, 2000. "A Tax on Tax Revenue. The Incentive Effects of Equalizing Transfers: Evidence from Germany," CESifo Working Paper Series 333, CESifo.
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    Cited by:

    1. Maria Cubel, 2010. "Fiscal equalization and political conflict," Working Papers 2010/9, Institut d'Economia de Barcelona (IEB).
    2. Maria Cubel, 2010. "Fiscal equalization and political conflict," Working Papers 2010/9, Institut d'Economia de Barcelona (IEB).

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    More about this item

    JEL classification:

    • H72 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Budget and Expenditures
    • H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism

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