efficiency and equalization payments in a federal system of government a synthesis and extensions of recent results this paper investigates the rationale for a system of equalization transfers in a federal system of government the existing sources of inefficiency of resource allocation in economies with more than one level of government are synthesized in the framework of a simple decentralized multiprovince model with mobile factors of production the sources of inefficiency arise first because migrants respond at the margin to incorrect signals owing to the phenomena of rent sharing and fiscal exterality and second because of global rather than local inefficiencies the model is then extended to consider the role of the federal government in providing intergovernmental transfers in the face of such inefficiencies in addition to synthesizing the sources of inefficiency in federal models the equity arguments for equalization are briefly recounted efficacite et paiements de perequation dans un systeme federal de gouvernement synthese et extensions de certains resultats recents ce memoire examine la logique qui soustend un systeme de paiements de perequation dans un systeme fdderal de gouverement les auteurs utilisent un modele simple d un systeme multi provincial decentralise avec des facteurs de production mobiles pour definir les sources d inefficacite dans l allocation des ressources dans les dconomies qui possedent plus d un niveau de gouvernement ces inefficacites proviennent de ce que d abord ceux qui se deplacent le font en reponse a la marge a des signaux incorrects engendres par le partage de la rente sur la base de la residence et par les phenomenes d exteralites fiscales elles sont aussi le resultat d inefficacites globales plutot que locales dans le cadre de ce modele les auteurs analysent le role du gouvernement federal effectuant des transferts inter gouverementaux pour corriger ces inefficacites en plus de presenter une synthese des sources d inefficacite dans les regimes federaux les auteurs font un bref rappel en passant a l ensemble des arguments fondes sur l equite qu on utilise pour rationaliser les paiements de perequation this paper is a linear combination of two papers presented at the may 1982 meetings of the canadian economics association in halifax entitled the case for equalization payments by the authors and recent developments in the theory of regional economic policy in canada by boadway the authors are grateful for comments by the discussants jim johnson and baxter macdonald and by jack mintz brian scarfe gerard belanger david sewell tom courchene and the referees we are especially heavily indebted to dan usher for many stimulating comments and suggestions while the work was in progress some of the above persons will undoubtedly disagree with the emphasis we have chosen to put on various aspects of the analysis for policy purposes support for some of this work has been provided by the economic council of canada and is gratefully acknowledged canadian journal of economics revue canadienne d economique xv no 4 november novembre 1982 printed in canada imprimd au canada 0008 4085 82 0000 0613 01 50 1982 canadian economics association this content downloaded from 207 46 13 127 on wed 12 oct 2016 04 27 47 utc all use subject to http about jstor org terms 614 robin boadway and frank flatters

interregional redistribution and budget institutions under asymmetric information empirical evidence from the u s and the european union suggests that regions which contribute to interregional redistribution face weaker borrowing constraints than regions which benefit from interregional redistribution this paper presents an argument in favor of such differentiated budget institutions it develops a two period model of a federation consisting of two types of regions the federal government redistributes from one type of regions contributors to the other type recipients it is shown that a fiscal constitution with lax budget rules for contributors and strict budget rules for recipients solves the self selection problem the federal government faces in the presence of asymmetric information regarding exogenous characteristics of the regions

reassessment of the tiebout model abstract the tiebout model has been the reference point for the classical approach to fiscal federalism its emphasis on mobility benefit taxation and the advantages of fiscal competition have informed fiscal federalism since the seminal contributions of musgrave and oates this paper reviews the influence that the tiebout model has had on fiscal federalism and argues that while its insights remain relevant for local government it is far from compelling as a positive description of or a normative prescription for fiscal federalism at the state level some aspects of alternative approaches are presented which lead to different perspectives than tiebout inspired ones

intergovernmental transfers and fiscal behavior insurance versus aggregate discipline abstract this paper evaluates the trade off between the advantages of risk sharing and the perils of common pool problems in federal fiscal arrangements under the assumption of asymmetric information we evaluate two alternative regimes of intergovernmental transfers in one regime the central government pre commits to a certain level of transfers that compensate vertical fiscal imbalances and provide some limited ex ante insurance in the other regime it accommodates ex post the fiscal needs of the different provinces in this second case full insurance results but the economy is subject to a tragedy of the fiscal commons with excessive subnational spending insufficient local taxation and reduced production of federal public goods we find the range of parameters for which one or the other institutional regime will be preferable the result is a fiscal federalism version of the usual trade off between rules and discretion

income redistribution in a common labor market when households are mobile among jurisdictions income redistribution by individual jurisdictions creates fiscal externalities a model of interjurisdictional migration is used to study the nature of this redistributive externality analysis of optimal redistribution and optimal corrective subsidies from higher level governments shows that benefit levels for the recipients of income transfers and tax rates on mobile taxpayers should be equalized across jurisdictions a system of jurisdictions with a common labor market can achieve welfare improvements through coordination of domestic redistributive policy or through the intervention of a higher level government copyright 1991 by american economic association

credibility and seigniorage in a common currency area in the paper we show that common currency areas tend to amplify the inefficiencies associated with lack of credibility of monetary policy lack of commitment in redistribution of seigniorage leads to excessive inflation and suboptimal taxation in the monetary union lack of commitment to inflation creates multiple inefficient equilibria that do not exist in a regime of national monetary independence

fiscal federalism and lobbying abstract which government functions should be decentralized resp centralized once lobbying behavior is taken into account we find that the answer largely depends on how the interests of the regional lobbies are positioned with respect to the function to be decentralized resp centralized when regional lobbies have conflicting interests then lobbying is less damaging for social welfare under centralization than under decentralization on the contrary when regional lobbies have aligned interests then lobbying is less damaging for social welfare under decentralization provided that policy spillovers on the non organized groups are not too strong

tax competition and revelation of preferences for public expenditure this paper considers a federal country composed of local jurisdictions that differ in their inhabitants tastes for public goods and which finance local public expenditure through a source based tax on capital income the taste for public goods is the private information of local governments the central government seeks an optimal policy in which grants to local governments are conditioned on local tax rates the uninformed central government seeks both to allocate capital efficiently among jurisdictions and to induce jurisdictions to provide an efficient mix of private and public consumption it is shown that there persist at this constrained optimum both some misallocation of capital and some violation of the samuelson rule for optimal public good provision in every jurisdiction c 1998 academic press

ex post redistribution in a federation implications for corrective policy abstract this paper analyzes whether changes in the timing of equalizing transfers to state governments necessitate an adjustment in federal corrective policy according to the existing literature assuming an ex ante choice of transfers the corrective grant is equal to the marginal damage benefit inflicted by externality generation when the federal government accommodates state finances ex post the grant differs in formula from existing prescription allocative federal policy corrects state policy incentives twofold it entails a correction for the distortion in the marginal benefit of state spending as in earlier literature and for the distortion in the marginal cost of public funds induced by the ex post provision of transfers the required grant rule is generically disproportionate to the equilibrium externality even with lump sum taxation furthermore the ex post provision of transfers is critical for the nature of the equilibrium inefficiency equalizing transfers at least partly internalize consumption spill overs but simultaneously establishes a new source of inefficiency as a final result the existing prescription for allocative federal policy continues to apply if the public good is pure

on enhanced cooperation abstract we analyze the issues relative to the formation of sub unions in a federation called enhanced cooperation agreements in the european union when centralization is not politically feasible an agreement among a subset of countries may allow such countries to exploit benefits from coordination that would otherwise be lost other countries in the federation may object to the sub union because it changes the status quo if cooperation at the federal level becomes convenient in the future the change in the status quo may adversely affect the countries which remained initially outside the sub union we show that as long as the countries can commit to coordinate on a policy which takes into account the utility of the excluded countries sub union formation may be optimal the relative advantage of a sub union towards immediate centralization increases when transfers are costly on the other hand if commitment is not possible then the excluded countries may be penalized we use the results to discuss the newly introduced rules for enhanced cooperation agreements in the european union

local public goods risk sharing and private information in federal systems abstract we examine the implications of information asymmetries for the optimal design of interregional insurance schemes and the allocation of local public goods we have good and bad news the good news is that the presence of informational asymmetries is not in itself sufficient to deny federations the attainment of either efficiency or egalitarian goals the bad news is that not only the first best may not be incentive compatible but also the incentive compatible optimum may violate participation constraints federations may have to content themselves with fourth best allocations as a result of strategic manipulation of information by privately informed jurisdictions

sharing budgetary austerity under free mobility and asymmetric information an optimal regulation approach to fiscal federalism in the present article tiebout meets laffont and tirole in the land of fiscal federalism a non trivial principal multi agent model is used to characterize the optimal intergovernmental grant schedule when the cost of local public goods depends on hidden characteristics and actions of local governments and under citizen free mobility we show how informational rents landlords interests and citizen mobility interact to produce distortions at both ends of the type space in particular the most efficient jurisdictions should overproduce and overtax in second best optimum informational asymmetries decrease the average production of public goods and increase the inter jurisdictional variance of taxes and public good production

preferences for inter regional redistribution what explains individual support for inter regional redistribution few studies examine support for regional redistribution even though such issues are politically salient in many democracies we test models that hypothesize that such preferences are affected by regional and individual income as well as other arguments beyond the traditional political economy framework we focus on informational assumptions and implications of these models with an experiment embedded in a nationally representative survey in spain we randomly inform some citizens of the true relative income of their region to assess the impact of this information on regional redistribution preferences we find that citizens learning about their region s relative position affects these preferences in a manner consistent with some of the political economy models we also find some support for out group concerns as an important factor the findings have implications for the applicability of economic models to explaining support for region

optimal regional redistribution under asymmetric information this paper studies optimal redistribution among two different regions in a federal state regional governments supply local public goods financed with distorting local taxes they have better information on their tax bases than the federal government we model this both as an adverse selection problem on the size of local tax bases and or as moral hazard problem on local tax enforcement moral hazard alone does not affect the first best redistribution rule which is a lump sum transfer from the rich to the poor region in all other cases the optimal transfer rule involves a lump sum tax on the rich regions and a premium for fiscal effort by the poor regions with the transfer falling short of the first best level in the equilibrium with moral hazard and adverse selection tax evasion occurs only in the poor region even though the possibility of lax tax enforcement benefits the rich and harms the poor region because it reduces equilibrium redistribution this abstract was borrowed from another version of this item

ghost citizens using notches to identify manipulation of population based grants this paper analyzes how local governments misreport population figures to obtain higher per capita grant allocations in 1998 the allocation of a formula based grant in spain switched from using the centrally administered census to local population registers administered by municipalities the value of this per capita grant changes at fixed population thresholds for the entire local population we exploit these notches to analyze the size distribution of municipalities to detect deliberate manipulation of the grant assignment variable this allows us to causally identify the effect of grant generosity on population over reporting we document an excess mass of municipalities to the right of the notch threshold and a density hole to the left of it local registers included a proportion of ghost citizens that is people who presented no trace of actually residing in the municipalities which benefit the most from inflating population figures to pass the relevant threshold we document that manipulation rather than real population responses is the mechanism at work the main channel behind manipulation is the incorrect treatment of foreign residents to inflate total local population

optimal secession rules abstract should the constitution of a federation allow for peaceful secession constitutionally defined secession rules are optimal ex post if the federation breaks down however they may be suboptimal ex ante if the member countries receive a benefit from the perceived long term stability of the federation and constitutionally defined secession rules increase the probability of a break up the optimal social contract trades off ex ante benefits and ex post losses and it may avoid explicit secession rules if transfers are costly the trade off is present even if ex post renegotiation is allowed finally we show that under asymmetric information it is more difficult to keep the federation together and that a secession war may occur

inter regional redistribution through infrastructure investment tactical or programmatic in this paper we study the political economy of the inter regional allocation of investment in infrastructure in an effort to disentangle tactical and programmatic motives where tactical politics refers to the discretionary allocation of investment to districts with more political clout and programmatic politics refers to the allocation of investment according to certain objective criteria e g income level we use a panel of data from the spanish electoral districts for the period 1964 2004 to estimate an equation in which investment depends both on economic and political variables the results show that tactical politics do matter since the districts receiving the most funds are those in which i the incumbent s vote margin is low ii few votes are needed to win an additional seat in the legislature iii the central and regional governments are controlled by the same party and iv regional parties play a pivotal role in the legislature however the results also show that programmatic politics matter since inter regional redistribution is shown to increase i with the arrival of democracy and european union funds ii under leftist governments and iii the weaker the correlation is between political clout and regional income

competing in taxes and investment under fiscal equalization the paper considers a model of federation with two heterogeneous regions that try to attract the capital by competing in capital income taxes and public investment that enhance the productivity of capital regions choices determine allocation of capital across the regions and their revenues under a tax sharing scheme this framework allows for the examination of different approaches to fiscal equalization schemes boadway r flatters f 1982 efficiency and equalization payments in a federal system of government a synthesis and extension of recent results canadian journal of economics 15 613 633 weingast b r 2006 second generation fiscal federalism implication for decentralized democratic governance and economic development working paper hoover institution stanford university we show that tax competition distorts downwards public investments and that the equalization grants discourage public investments with a little effect on equilibrium taxes however the equalization schemes remain beneficial not only for the federation and under a low degree of regional asymmetry also for each region c 2008 elsevier b v all rights reserved

tax competition and tax coordination in a median voter model this paper analyzes the welfare effects of capital tax coordination in a simple model of fiscal competition where fiscal policy is subject to majority voting and households differ with respect to their labor and capital income it turns out that a coordinated capital tax increase may raise or reduce welfare depending on the relative magnitude of i economic distortions induced by a labor tax and ii political distortions resulting from the influence of the median voter on fiscal policy decisions a negative welfare effect is more likely the smaller the marginal excess burden of the labor tax and the smaller the ratio of the median voter s labor income to average labor income we also use empirical estimates of the marginal excess burden of taxation to determine the welfare effects of tax coordination it turns out that a negative welfare effect of coordinated tax increases may emerge in our model for empirically reasonable parameters

federal fiscal constitutions risk sharing and redistribution the paper studies the political and economic determinants of regional public transfers specifically it focuses on how such transfers are shaped by alternative fiscal constitutions where a constitution is an allocation of fiscal instruments across different levels of governments plus a procedure for the collective choice of these instruments realistic restrictions on fiscal instruments introduce a tradeoff between risk sharing and redistribution different constitutions produce very different results in particular a federal social insurance scheme chosen by voting provides overinsurance whereas an intergovernmental transfer scheme chosen by bargaining provides underinsurance

the shopping basket a model for multicategory purchase incidence decisions consumers make multicategory decisions in a variety of contexts such as choice of multiple categories during a shopping trip or mail order purchasing the choice of one category may affect the selection of another category due to the complementary nature e g cake mix and cake frosting of the two categories alternatively two categories may co occur in a shopping basket not because they are complementary but because of similar purchase cycles e g beer and diapers or because of a host of other unobserved factors while complementarity gives managers some control over consumers buying behavior e g a change in the price of cake mix could change the purchase probability of cake frosting co occurrence or co incidence is less controllable other factors that may affect multi category choice may be unobserved household preferences or observed household demographics we also argue that not accounting for these three factors simultaneously could lead to erroneous inferences we then develop a conceptual framework that incorporates complementarity co incidence and heterogeneity both observed and unobserved as the factors that could lead to multi category choice we then translate this framework into a model of multi category choice our model is based on random utility theory and allows for simultaneous interdependent choice of many items this model the multivariate probit model is implemented in a hierarchical bayes framework the hierarchy consists of three levels the first level captures the choice of items for the shopping basket during a shopping trip the second level captures differences across households and the third level specifies the priors for the unknown parameters we generalize some recent advances in markov chain monte carlo methods in order to estimate the model specifically we use a substitution sampler which incorporates techniques such as the metropolis hit and run algorithm and the gibbs sampler the model is estimated on four categories cake mix cake frosting fabric detergent and fabric softener using multicategory panel data the results disentangle the complementarity and co incidence effects the complementarity results show that pricing and promotional changes in one category affect purchase incidence in related product categories in general the cross price and cross promotion effects are smaller than the own price and own promotions effects the cross effects are also asymmetric across pairs of categories i e related category pairs may be characterized as having a primary and a secondary category thus these results provide a more complete description of the effects of promotional changes by examining them both within and across categories the co incidence results show the extent of the relationship between categories that arises from uncontrollable and unobserved factors these results are useful since they provide insights into a general structure of dependence relationships across categories the heterogeneity results show that observed demographic factors such as family size influence the intrinsic category preference of households larger family sizes also tend to make households more price sensitive for both the primary and secondary categories we find that price sensitivities across categories are not highly correlated at the household level we also find some evidence that intrinsic preferences for cake mix and cake frosting are more closely related than preferences for fabric detergent and fabric softener we compare our model with a series of null models using both estimation and holdout samples we show that both complementarity and co incidence play a significant role inpredicting multicategory choice we also show how many single category models used in conjunction may not be good predictors of joint choice our results are likely to be of interest to retailers and manufacturers trying to optimize pricing and promotion strategies across many categories as well as in designing micromarketing strategies we illustrate some of these benefits by carrying out an analysis which shows that the true impact of complementarity and co incidence on profitability is significant in a retail setting our model can also be applied to other domains the combination of item interdependence and individual household level estimates may be of particular interest to database marketers in building customized cross selling strategies in the direct mail and financial service industries

decentralisation as an incentive scheme recent changes have introduced more decentralization in a number of traditionally centralized countries 1 in the case of france it is sometimes claimed that the 1982 1983 reform of subcentral government is of historical importance although the principles of that reform are not contested any more by the new majority elected in 1986 opinions still differ on a number of policy issues some of the issues are presented in this introductory section but the main purpose of this paper is not to expose or discuss in detail the problems of decentralization in france as argued in the second part of the introductory section the theoretical framework in which the policy issues of decentralization are usually discussed by economists is somewhat unsatisfactory in particular when applied to unitary states such as britain or france the bulk of the paper is devoted to the exploration of a different approach to decentralization it is not purported however that this approach could completely replace the more traditional one consequently when in the concluding section we return briefly to the policy issues identified here this is to be read as a preliminary attempt to evaluate the relevance of the reasoning developed in the paper

federalism and the soft budget constraint the government s incentives to bail out inefficient projects are determined by the trade off between political benefits and economic costs the latter depending on the decentralization of government two effects of federalism are derived first fiscal competition among local governments under factor mobility increases the opportunity costs of bailout and thus serves as a commitment device the competition effect second monetary centralization together with fiscal decentralization induces a conflict of interests and thus may harden budget constraints and reduce inflation the checks and balance effect the authors analysis is used to interpret china s recent experience of transition to a market economy copyright 1998 by american economic association

contingent deficit sanctions and moral hazard with a stability pact abstract we show how a stability pact based on deficit sanctions eliminates the exacerbation of debt accumulation that may arise from monetary unification moreover with sanctions contingent on the observed state of the economy the pact avoids aggravating the situation of a country in recession moral hazard problems arise if the state also depends on unobservable politically costly fiscal effort this could explain why sanctions under the actual stability and growth pact are only automatically waived in extreme recessions and why the procedure linking observed deficits and sanctions involves a long and detailed assessment of a country s situation

critical ethical naturalism and the transformation of economics in this article i shall argue that critical ethical naturalism an ethical position elaborated by tony lawson can help understand lawson s critique of modern mainstream economics according to critical ethical naturalism human action should be concerned with removing obstacles that lie in the way of human development and flourishing the attempt of transforming economics into a discipline that contributes to human development rather than being an obstacle to such a development can be seen as an exercise driven by critical ethical naturalism albeit in a more implicit way in lawson s earlier writings and in a more explicit way in more recent writings but the significance of critical ethical naturalism as elaborated by lawson goes well beyond the problem of transforming economics and so i shall also highlight some more general implications of this ethical position before addressing the specific problem of transforming economics to do so i will first present lawson s critical ethical naturalism while showing the relevance of his social ontology for the study of ethics at various levels of generality including meta ethics ethical theory and applied ethics

harmonization and side payments in political cooperation for two districts or countries that try to internalize externalities i analyze a bargaining game under private information i derive conditions for when it is efficient with uniform policies across regions with and without side payments and when it is efficient to prohibit side payments in the negotiations while policy differentiation and side payments allow the policy to better reflect local conditions they create conflicts between the regions and thus delay the results also describe when political centralization outperforms decentralized cooperation and they provide a theoretical foundation for the controversial uniformity assumption traditionally used by the fiscal federalism literature

nonlinear income taxation and matching grants in a federation with decentralized in kind transfers we extend to a fiscal federalism setting the literature on redistributive in kind transfers in the presence of nonlinear income taxation local governments have a cost advantage motivating decentralization of the in kind transfer the cost structure varies across regions and the central government cannot observe which region is which we show that decentralized in kind transfers can in this setting be an even more important instrument for relaxing self selection constraints thus helping redistribution than in single government models we characterize the optimal marginal tax rates and matching grants the grants have a very different structure than the one derived in earlier studies

self selection and pareto efficient taxation abstract this paper analyses the set of pareto efficient tax structures the formulation of the problem as one of self selection not only shows more clearly the similarity between this problem and a number of other problems such as the optimal pricing of a monopolist which have recently been the subject of extensive research but also allows the derivation of a number of new results we establish i under fairly weak conditions randomization of tax structures is desirable ii if different individuals are not perfect substitutes for one another in production then the general equilibrium effects until now largely ignored in the literature of changes in the tax structure may be dominant in determining the optimal tax structure in particular if the relative wage of high ability and low ability individuals depends on the relative supplies of labor the optimal tax structure entails a negative marginal tax rate on the high ability individuals and a positive marginal tax rate on the low ability individuals the marnitude of which depends on the elasticity of substitution iii if individuals differ in their preferences pareto efficient taxation may entail negative marginal tax rates for high incomes while iv if wage income is stochastic the marginal tax rate at the upper end may be 100 our analysis thus makes clear that the main qualitative properties of the optimal tax structure to which earlier studies called attention are not robust to these attempts to make the theory more realistic