an estimate of the welfare gain from fiscal equalization in the last several years it has become a commonplace in canadian economics that intergovernmental grants may be necessary in a federal state to prevent inefficiencies in the geographic allocation of factors of production this paper uses winer and gauthier s recent results on fiscally induced interprovincial migration to estimate both the actual and potential efficiency gain produced by the current equalization program these are found to be a minute fraction of the program s cost une evaluation des gains d efficacite engendres par la perequationfiscale depuis plusieurs annees la science economique canadienne admet que les subventions intergouverne mentales sont sans doute necessaires dans un etat federal pour eviter toute inefficacite dans la repartition geographique des facteurs de production le present article s appuie sur les resultats recents de winer et gauthier au sujet des migrations interprovinciales induites par des incitations fiscales pour evaluer les gains d efficacite reels et potentiels decoulant du programme de perequation en vigueur i1 s avere que ceux ci representent une fraction infime des cofuts du programme the idea that decentralized fiscal systems may give rise to inefficient migration is by now well established in the literature on fiscal federalism so too is its corollary that a system of grants can be used to neutralize such inducements to inefficiency the seminal contribution to the literature is buchanan s 1950 paper on fiscal equity buchanan argued that in order to achieve both horizontal equity and least price distortion in a federal state it would be necessary to neutralize any differences across jurisdictions in the fiscal treatment of individuals the intuition of the argument is simple if bi is the per capita benefit created by provincial expenditures in province i ti the per capita tax burden and mpi the marginal product of labour in province i then for any i j mpi mpj a necessary condition for the maximization of national

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

nash implementation a complete characterization the authors extend e maskin s results on nash implementation first they establish a condition that is both necessary and sufficient for nash implementability if there are three or more agents the case covered by maskin s sufficiency result second and more important they examine the two agent case for which there existed no general sufficiency results the two agent model is the leading case for applications to contracting and bargaining for this case too they establish a condition that is both necessary and sufficient the authors use their theorems to derive simpler sufficiency conditions that are applicable in a wide variety of economic environments copyright 1990 by the econometric society

unemployment growth and taxation in industrial countries unemployeement and taxes do taxes affect the rate of umemployeement to the layman the upward trend in european unemployment is related to the slowdown of economic growth we argue that the layman s view is correct the increase in european unemployment and the slowdown in economic growth are related because they stem from a common cause an excessively rapid growth in the cost of labour in europe labour costs have gone up for many reasons but one is particularly easy to identify higher taxes on labour if wages are set by strong and decentralized trade unions an increase in labour taxes is shifted onto higher real wages this has two effects first it reduces labour demand and thus creates unemployment secondly as firms substitute capital for labour the marginal product of capital falls over long periods of time this in turn diminishes the incentive to invest and to grow the data strongly support this view according to our estimates the observed rise of 14 percentage points in labour tax rates between 1965 and 1995 in the eu could account for a rise in eu unemployment of roughly 4 percentage points a reduction of the investment share of output of about 3 percentage points and a growth slowdown of about 0 4 percentage points a year francesco daveri and guido tabellini

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

internal capital markets and the competition for corporate resources this article examines the role of corporate headquarters in allocating scarce resources to competing projects in an internal capital market unlike a bank headquarters has control rights that enable it to engage in winner picking the practice of actively shifting funds from one project to another by doing a good job in the winner picking dimension headquarters can create value even when it cannot help at all to relax overall firm wide credit constraints the model implies that internal capital markets may sometimes function more efficiently when headquarters oversees a small and focused set of projects this article analyzes the process by which internal capital markets channel limited resources to different uses inside a company in so doing it seeks to address two related sets of questions first what is the fundamental economic rationale for creating an internal capital market that is under what circumstances can it make sense to combine several technologically distinct projects under one roof and have them seek funding from corporate headquarters as opposed to setting them up as stand alone companies that each raise external financing on their own second given this rationale what is the optimal size and scope of an internal capital market should headquarters be involved in funding a large number of projects or just a few and should these projects be unrelated to one another or in similar lines of business the answers to both sets of questions flow from the insight that in a credit constrained setting where not all positive npv projects can be financed headquarters can create value by actively reallocating scarce funds across projects for example the cash flow generated by one division s activities may be taken and spent on investment in another division where the returns are higher or alternatively one division s assets may be used as collateral to raise financing that is then diverted to the other division simply put individual projects must compete for the scarce funds and headquarters job is to pick the winners and losers in this competition

interprovincial migration and local public goods the objective of this paper is to test whether fiscally induced migration occurs in canada that is whether interprovincial migration flows are influenced by government tax and expenditure policies in order to do so a multinominal logit model of migration is developed in which individuals choose to live in the province where their utility would be highest the model is estimated using aggregate data for the period 1962 81 the results indicate that migration is influenced by provincial government spending trough the magnitude and direction of the effect differs with the type of government spending the implication of these results is that intergovernmental transfer payments and provincial natural resource revenues also have the potential to influence migration flows in canada summary in fre excerpt

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

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

collective bargaining and regional wage differences in spain an empirical analysis this article analyses the importance of labour market institutions and in particular collective wage bargaining in shaping regional wage differences in the spanish labour market using microdata from the spanish structure of earnings survey our results reveal that there are significant inter regional wage differences for similarly skilled workers these differences are present throughout the whole wage structure and can be explained by both competitive and non competitive factors such as insufficient competition in product markets in this context industry level collective bargaining plays a major role in accounting for regional wage differences a role that in the spanish case is enhanced due to its unusual regional dimension

tiebout with politics capital tax competition and constitutional choices this paper examines how capital tax competition affects jurisdiction formation we describe a non cooperative locational model of public goods provision choices where the levels of taxation and the local public good varieties provided within jurisdictions are selected by majority voting and where equilibrium jurisdictions consist of consumers with similar tastes we show that interjurisdictional tax competition results in an enlargement of jurisdictional boundaries and even in the absence of intrajurisdictional transfers can raise welfare for all members of a jurisdiction

auctioning incentive contracts this paper draws a remarkably simple bridge between auction theory and incentive theory it considers the auctioning of an indivisible project among several fi rms the firms have private information about their future cost at th e bidding stage and the selected firm ex post invests in cost reduct ion the authors show that 1 the optimal auction can be implemented by a dominant strategy auction that uses information about both the first bid and the second bid 2 the winner faces a linear incenti ve contract 3 the fixed transfer to the winner decreases with his announced expected cost and increases with the second lowest announce d expected cost and 4 the share of cost overruns borne by the winn er decreases with the winner s announced expected cost copyright 1987 by university of chicago press

an empirical analysis of intergovernmental tax interaction the case of business income taxes in canada both federal and provincial governments in canada levy corporate taxes on busi nesses in their jurisdictions which potentially gives rise to horizontal and vertical tax exter nalities within the federation using a simple model of interdependent tax choices we estimate tax setting functions for the federal government ontario quebec and an aggregate of the remaining eight provinces we find evidence of significant vertical and horizontal tax inter actions provincial tax rates respond negatively to the federal tax rate while at least some provinces increase their tax rates in response to increases in the tax rates of other provinces

wage bargaining and the phillips curve the identification and specification of aggregate wage equations most economists believe that wage setting is very important for understanding macroeconomic behavior but the form of wage equations commonly estimated suffer from problems of identification the aim of this paper is to consider whether these problems are inevitable and if they are not to suggest ways in whi ch one can estimate structural models of wage setting it is argued that if one confines attention to models of wage bargaining t hat are commonly used identification of the parameters of wage setting should not be a problem and that the most appropriate form of an aggregate wage equation should be a phillips curve copyright 1993 by royal economic society

vertical irmbalance in the fiscal systems of federal states a theory of vertical fiscal imbalance in federal states vfi is developed which distinguishes between long run and short run imbalances and between normative and positive interpretations of the concept the analysis is carried out in the context of a simple three sector model where the allocation of national output among sectors results from interaction of a public choice process with an overall resource constraint the paper proposes welfare theoretic definitions of long run and short run vfi in addition it uses the concept as part of a positive analysis in order to reassess broad trends in canadian fiscal history

the flypaper effect what happens to a state s spending when it receives an unconditional grant from the federal government the standard theoretical analysis predicts that the increase in spending will be the same as that generated by an equivalent increase in local incomes or roughly 5 10 percent for most states in contrast numerous empirical analyses have found that spending increases by much more with some estimates near 100 percent this result is known as the flypaper effect since the money appears to stick where it hits the authors review this evidence as well as other studies that find similar behavior in firms

a fiscal federalism analysis of debt policies by sovereign regional governments this paper takes a fiscal federalism approach to analyzing debt issue by subfederal regional governments households have a short run attachment to a particular region but are free to migrate between regions in the long run regional governments choose their fiscal policies independently it is shown that the nash equilibrium of regional fiscal policies is one where migration is efficient and households are insured against the idiosyncratic part of shocks occurring in the region in which they live however regional governments issue too much debt relative to the level that would be issued under a coordinated policy such as that which might be carried out by a federal government

simple menus of contracts in cost based procurement and regulation in an influential paper jean jacques laffont and jean tirole 1986 formulated a principal agent model of cost based procurement and regulation and showed that the principal can implement the optimal mechanism by offering the agent a menu consisting of a continuum of linear contracts two related problems with applying this theory in practice have been that the economic logic and the underlying mathematics involved in calculating the optimal menu are quite complex and the principal must be able to specify the agent s entire disutility of effort function in order to calculate the optimal menu as a result the model has not been widely used in practice to either calculate actual incentive contracts or even to develop useful qualitative guidance about the nature of the optimal solution and how it is affected by various economic factors the purpose of this paper is to show that dramatically simpler menus which are easy to understand and calculate and which have lower informational requirements can at least in some cases capture a substantial share of the gains achievable by the fully optimal complex menu in particular this paper considers two item menus where one item is a cost reimbursement contract and the other item is a fixed price contract such menus are called fixed price cost reimbursement fpcr menus for the case where the agent s utility is quadratic and the agent s type is distributed uniformly it is shown that the optimal fpcr menu always captures at least three quarters of the gain that the optimal complex menu achieves where the gain is measured relative to the result of using a cost reimbursement contract this paper s research was originally motivated by a policy issue in defense procurement in the united states the department of defense dod purchases almost all major weapons systems from sole source contractors using contracting methods that essentially amount to using cost reimbursement contracts the best way to understand why dod uses costreimbursement contracting methods is that they perform precisely the function identified in laffont and tirole s principal agent model they guarantee in a situation that amounts to a bilateral monopoly that dod and the firm can reach an agreement i e they guarantee that the agent will always produce the good of course the use of cost reimbursement contracting methods

cost sharing versus block funding in a federal system a demand systems approach this paper employs a maximizing framework consistent with the axioms of consumer preference to analyze local government s choice of spending on different social services within this framework it is possible to include both block funding and cost sharing intergovernment transfer schemes canada s movement to block funding from the cost sharing method of financing provincial expenditures on hospitals medical care and post secondary education is analyzed the results indicate that the provincial governments actions are generally consistent with a significant maximizing model of consumer behavior and that the change to block funding had a significant impact on real provincial funding of some previously cost shared social services

awarding monopoly franchises the authors analyze how to award a monopoly franchise when the objective is to maximize expected consumers surplus net of transfer payments to the producer potential producers initially possess independent private information about uncertain production costs only the chosen producer subsequently observes realized production costs after awarding the franchise to the producer with the lowest expected costs prices are optimally set above realized marginal cost these ex post distortions foster more competitive bidding ex ante the distortions for any bid cost pair are invariant to the number of bidders n though expected distortions and profits decline with n copyright 1987 by american economic association

redistribution within and across the regions of a federation the authors reconsider the literature on redistribution within a federation with mobile agents they conclude that redistribution is a function best assigned to the national government local governments with diverse preferences for redistribution distort individual migration decisions the authors also examine the fiscal externality literature which has made an efficiency argument for interregional transfers they show that if local governments have the same preferences for redistribution the nash equilibrium is efficient if preferences are diverse the authors show that nationally imposed interregional transfers do not address the source of the inefficiency nevertheless interregional transfers are shown to be a part of decentralized behavior

fiscal inequivalence incentive equivalence and pareto efficiency in a decentralized urban context abstract we develop a simple urban model consisting of a center and a suburb populated by a fixed number of identical individuals who can migrate costlessly between jurisdictions land ownership ranges from rent sharing to an absentee landlord who owns all urban land we discuss laissez faire equilibrium and show that it is pareto efficient we then introduce local governments which are only concerned about the welfare of their residents and which can collect head and land taxes whereas the former is purely local the latter will extend to both jurisdictions if individuals own a positive share of the entire urban land and beyond if there is an absentee landlord this produces a simple kind of fiscal inequivalence tax exporting since local governments do not provide public goods their role is limited to stopping the flow of resources leaving their jurisdiction they then redistribute this revenue as a head subsidy to the residents of their jurisdiction if it just happens that the head subsidy is equal between jurisdictions the equilibrium is both pareto efficient and a preferable to laissez faire from the viewpoint of urban residents if however it varies between jurisdictions the equilibrium is pareto inefficient the jurisdiction providing a higher per head subsidy becomes overpopulated we thus arrive at a classic market failure in the literature of competing regions correction involves aggregate interjurisdictional transfers to equalize head subsidies which in the literature must be undertaken by a central government following myers j public econ 43 107 121 1990 we treat this as an assumption rather than a necessity we show that if aggregate transfers become a local instrument the nash equilibrium will be both pareto efficient and preferable to laissez faire this happens because free mobility compels noncooperative local governments to act in a cooperative way we then extend this result to public goods which need be neither purely public congestion nor purely local spillovers we conclude by discussing implications for the existing urban literature

the welfare state and competitiveness in all industrial countries fiscal policy is increasingly about redistribution in this paper the authors study redistribution across different types of agents in a world characterized by the presence of labor unions and distortionary taxation they show that an increase in transfers financed by distortionary taxation has nonlinear effects on unit labor costs relative to the other countries depending on the degree of centralization of the wage setting process in the labor market the authors find considerable empirical support for the model in a sample of fourteen oecd countries copyright 1997 by american economic association

can partial fiscal coordination be welfare worsening a model of tax competition most work on tax competition argues that mobile factors tend to be undertaxed except if there is coordination of tax policies full coordination is not however always feasible and as a consequence some measures of partial coordination have been proposed such as minimal withholding taxes on interest income we show that partial coordination can be in some instances welfare worsening and that then no coordination is to be preferred

the impressive contribution of canadian economists to fiscal federalism theory and policy the study of fiscal federalism has been central to the research of canadian economists since the rowell sirois report to mark the 50th anniversary of the founding of the canadian economics association it is fitting to take stock of their contributions we focus on the period since 1982 and emphasize the main scholarly publications of an inclusive array of canadian economists and economists in canadian universities our attention is devoted to applications in the context of federal and provincial governments setting aside related issues in municipal government finance we briefly discuss instances where the fiscal federalism literature has informed policy debates including through policy research institutes government commissions and international organizations la contribution impressionnante des economistes canadiens a la theorie et a la politique du federalisme fiscal l etude du federalisme fiscal a ete un element central de la recherche des economistes canadiens depuis la commission rowell sirois au moment de celebrer le 50eme anniversaire de la fondation de l association canadienne d economique le moment est approprie pour prendre la mesure de leurs contributions on se concentre sur la periode apres 1982 et on souligne les principales publications savantes d un ensemble inclusif d economistes canadiens et d economistes dans les universites canadiennes une attention particuliere est portee aux applications dans le contexte federal et provincial mettant de cote les enjeux relies a la finance municipale on discute brievement des instances ou la litterature sur le federalisme fiscal a eclaire les debats de politiques publiques y compris a travers les instituts de recherche sur les politiques publiques les commissions gouvernementales et les organisations internationales

public input competition abstract public investment in infrastructure may help create agglomeration economies by attracting mobile factors such as skilled labour competition among regions in public investment can then be destructive this paper analyzes the nash equilibria to a simple model of public input competition even though the regions are assumed identical the equilibrium may not be symmetric the problem with non cooperative behaviour is not only that regions invest too much but that too many regions may choose to invest depending on the parameter values the nash equilibrium may be efficient may be inefficient or may not exist at least not in pure strategies better mobility among regions leads to more aggressive competition the analysis suggests that rents from public investment may be dissipated by governments competition to attract mobile factors

the determinants of municipal tax rates in british columbia in this paper we study the regional pattern of municipal business property tax rates in the province of british columbia reduced form tax setting equations produce some evidence that municipal governments respond to tax changes in neighbouring jurisdictions a joint investigation of the determinants of tax base and municipal taxation decisions however reveals that it is difficult to interpret this response as arising primarily out of competition over tax base there is also some evidence that municipal tax rates are sensitive to taxes set on the same base by super municipal bodies jel classification c33 h71 les determinants des taux d imposition municipale en colombie britannique dans ce memoire les auteurs etudient le pattern regional des taux d imposition municipale sur la propriete fonciere commerciale dans la province de la colombie britannique on montre a l aide d un modele en forme reduite d equations de definition des taux d imposition que les gouvernements municipaux reagissent aux changements dans les taux d imposition dans leur voisinage cependant un examen conjoint des determinants de la base d imposition et des decisions municipales montre qu il est difficile d interpreter cette reaction comme emanant d une concurrence fiscale on montre aussi que les taux d imposition municipale sont sensibles aux niveaux de fiscalite imposes sur la meme base par les autorites supra municipales

strategic capital tax competition a pecuniary externality and a corrective device abstract d e wildasin journal of urban economics25 193 212 1989 identifies a source of inefficiency in capital tax competition models with price taking jurisdictions and provides a pigovian correction this paper identifies a second source of inefficiency in a non price taking environment when a jurisdiction increases its capital tax it affects the price of capital and thus other jurisdictions returns from trade in capital the pigovian correction to internalize this pecuniary externality is derived since a focus of recent research is on non price taking environments the existence of the pecuniary externality is important in qualifying existing results in the literature

optimality free mobility and the regional authority in a federation abstract this paper examines the efficiency properties of a federation characterized by strategically competing regions and freely mobile homogeneous individuals analyses of this economy have concluded that achieving a pareto optimal will require intervention by a national authority this paper makes one basic point the nash equilibrium of regional authority behavior is pareto optimal the implication is that there is no role for a national authority in either providing interregional transfers or correcting for decentralized provision of public goods the nash equilibrium involves samuelson public goods provision and regions purchasing preferred population distributions with optimal interregional transfers

unique implementation of incentive contracts with many agents in this paper we consider the problem of implementation when a principal hires many agents and is not able to monitor their actions we distinguish two cases i when actions are mutually observable among agents ii when actions are not observable at all in i there is a mechanism in which the first best arises as a unique perfect equilibrium in ii we show by two examples that typically there are multiple equilibria if the principal merely offers a set of optimal sharing rules however we prove that the principal can use these optimal sharing rules as a starting point and construct a multi stage mechanism that has a unique second best perfect bayesian equilibrium

too big or too small a synthetic view of the commitment problem of interregional transfers abstract there is a growing body of literature on the commitment problem of interregional transfers the problem occurs because of an ex post bailout by a central government leading to ex ante adverse incentive consequences for a local government however different models have yielded different economic consequences the local government may be too large overspending and or overborrowing or it may be too small raising less of its own revenue in the presence of interregional spillovers the equilibrium may yield a pareto efficient outcome the present paper aims to synthesize these models developing a simple decentralized leadership model a critical question concerns what decision is made ex ante by the local government namely public expenditure or tax collection with the remaining policy instrument being residual adjusted by ex post transfers we discuss how different scenarios affect the equilibrium outcome

the role of shocks and institutions in the rise of european unemployment the aggregate evidence two key facts about european unemployment must be explained the rise in unemployment since the 1960s and the heterogeneity of individual country experiences while adverse shocks can potentially explain much of the rise in unemployment there is insufficient heterogeneity in these shocks to explain cross country differences alternatively while explanations focusing on labour market institutions explain current heterogeneity well many of these institutions pre date the rise in unemployment based on a panel of institutions and shocks for 20 oecd nations since 1960 we find that the interaction between shocks and institutions is crucial to explaining both stylised facts

economic versus political symmetry and the welfare concern with market integration and tax competition abstract the paper studies the implications of increased capital market integration and the associated increased tax competition for world welfare we consider a population with heterogeneous endowments of capital in a model of redistributive politics we show that if countries have the same average capital endowments but differ with respect to the endowments of their decisive majority autarky may be socially preferred to integration under any aversion to inequality we then reverse the conclusion by assuming that the decisive majority has the same endowment but countries differ in their average capital endowments in proving these results we show that integration may decrease world output and increase the utility of the poorest members of the economy

an empirical study of matching grants the cap on cap abstract funding mechanisms for social expenditures are currently being reformed in many countries while the theoretical implications of these changes are often easily identified their empirical magnitude is not always as clear for example in federal systems social expenditure is often funded by matching grants and estimates of the effect of varying matching rates on expenditures by sub national governments vary widely the ambiguity is due in part to inherent difficulties identifying price and income effects of federal grants given the structure of the funding mechanisms in most countries in this paper we examine a recent reform in canada in which federal grants for welfare expenditures were capped converted from an open ended to a closed ended matching grant importantly the cap applied to only three of 10 provincial governments our empirical strategy exploits the time series cross section variation in the funding mechanism provided by the differential application of the reform this approach potentially surmounts some of the difficulties which have beset earlier studies we find that the affected provinces did respond to the reform by reducing the growth rate of expenditures it was 8 to 9 percentage points lower than predicted in the absence of the cap over the medium term

pure public goods and income redistribution in a federation with decentralized leadership and imperfect labor mobility abstract we examine the non cooperative provision of a pure public good by regional governments in a federation similar to the european union where regional governments are stackelberg leaders and the central government is a stackelberg follower a federation with decentralized leadership the center makes interregional income transfers after it observes the contributions to the pure public good imperfectly mobile workers react to regional and central governments policies by establishing residence in their most preferred region despite the degree of labor mobility we show that the pure public good and interregional transfers are generally allocated efficiently in a federation with decentralized leadership

the political economy of policy centralization direct versus representative democracy abstract this paper analyzes policy centralization outcomes in a two jurisdiction model of public good provision choices with heterogeneous policy preferences and interjurisdictional policy spillovers under two alternative political procedures direct referendum and representative democracy we show that policy centralization is more likely to occur if the choice to centralize is made by elected policymakers rather than by referendum in these situations centralized policies converge to the preferred level of the jurisdiction that least favours centralization rather than to a compromise between the two jurisdictions preferred levels

ex post information in auctions assumptions maskin and riley 1984 show that when the amount a buyer is willing to pay for the auctioned object is not independent of his wealth expected revenue tends to be lower under open bidding in contrast milgrom and weber 1982 relax the assumption that valuations are independent and assume instead that buyers private estimates of the item s value are affiliated a buyer with a high estimate then tends to believe that other buyers will have higher estimates as well maintaining the other assumptions milgrom and weber show that expected revenue is higher in the open ascending bid auction the intuition behind this result is that in sealed high bid auctions a buyer s bid is determined not only by his own beliefs but via their bids by the beliefs of those with lower estimates a buyer with a low estimate believes that others are more likely to have low estimates as well he therefore bids less aggressively it follows that a buyer can beat all opponents who have lower estimates with a bid which is lower than it would be if beliefs were independent 2 milgrom and weber also show that if the seller purchases and then publicly reveals information which is positively linked to buyers valuations this also raises expected gross revenue from an auction the intuition here is that this helps to reduce the difference in bidders willingness to pay 3 that such a reduction should raise expected revenue is easily understood for the limiting case in which the seller s information includes all the buyers private information for then all buyer asymmetry is eliminated and so expected buyer profit is bid away to zero the seller therefore reaps the entire surplus in the following pages the implications of correlated signals are further explored while milgrom and weber emphasized the potential gains to a seller who reveals information ex ante the focus here is on ex post information in section 2 it is shown that under weak assumptions the sealed high bid auction is dominated by any auction

vertical fiscal externalities in a federation abstract we examine vertical fiscal externalities in a model where a state government provides a productivity enhancing public input and both the state and the central government tax wages and profits previous literature has emphasized the negative tax externality that occurs when two levels of government impose distortionary taxes on the same tax base we show that an increase in the state government s tax rate on wage income can increase federal revenues if the federal government imposes an ad valorem tax on employees wages and the demand for labour is inelastic we also show that an increase in the provision of the public input can either increase or reduce federal tax revenues leading to either under or over provision of the public input by the state government

the deductibility of provincial business taxes in a federation with vertical fiscal externalities should provincial business taxes be deductible under a federal profit tax we show that the optimal deductible which neutralizes the vertical fiscal externality between the federal and provincial government is the change in the federal tax base per dollar of tax revenue collected by the provincial government the optimal payroll tax deductibility rate depends on the extent to which it is shifted to workers and on the difference between the federal tax rates on profits and on labour income two apparently contradictory positions full deductibility of a payroll tax and non deductibility are special cases of our model la deductibilite des taxes provinciales imposees aux entreprises dans une federation ou il y a des externalites fiscales verticales est ce que les taxes provinciales imposees aux entreprises devraient etre deductibles de l impot federal sur les profits les auteurs montrent que l optimum de deductibilite qui neutralise les externalites fiscales verticales entre le federal et les provinces est le changement dans la base d imposition federale par dollar de revenu fiscal collecte par le gouvernement provincial le taux de deductibilite optimal d un impot sur les salaires depend de la portion du fardeau fiscal qui est deportee vers les travailleurs et de la difference entre les taux d imposition du federal sur les profits et sur le revenu du travail deux positions apparemment contradictoires pleine deductibilite d un impot sur les salaires et deductibilite nulle sont des cas speciaux du modele general

asymmetric tax competition abstract the paper analyzes nash equilibrium when two jurisdictions set tax rates on a tax base which is mobile between them population differences imply tax differences the smaller jurisdiction levies a lower tax rate in equilibrium and its residents are better off than those in the larger jurisdiction the nash equilibrium is inefficient if the two jurisdictions merged the resulting allocation would be efficient however if differences in population are great enough residents of the small jurisdiction would be made worse off by such a merger

shared accountability and partial decentralization in local public good provision abstract recent decentralization reforms in developing countries have often lead to the coexistence of multiple tiers of government in given policy areas triggering new accountability issues this paper provides a novel theoretical treatment of the efficiency consequences of such partial expenditure decentralization it develops a political agency model in which two levels of government are involved in the provision of a local public good with voters imperfectly informed about each government s contribution to the public good a central result of the model is that partial decentralization is desirable only if the benefits of vertical complementarity in public good provision outweigh the costs of reduced accountability which result from detrimental vertical strategic interactions operating through the electoral process through variants of the model the interplay between decentralization and democratization is analyzed from a positive point of view the model predicts a relationship between electoral incentives and equilibrium decentralization

resource allocation auctions within firms there is growing interest in the use of markets within firms proponents have noted that markets are a simple and efficient mechanism for allocating resources in economies in which information is dispersed in contrast to the use of markets in the broader economy the efficiency of an internal market is determined in large part by the endogenous contractual incentives provided to the participating privately informed agents in this paper we study the optimal design of managerial incentives when resources are allocated by an internal auction market as well as the efficiency of the resulting resource allocations we show that the internal auction market can achieve first best resource allocations and decisions but only at an excessive cost in compensation payments we then identify conditions under which the internal auction market and associated optimal incentive contracts achieve the benchmark second best outcome as determined using a direct revelation mechanism the advantage of the auction is that it is easier to implement than the direct revelation mechanism when the internal auction mechanism is unable to achieve second best we characterize the factors that determine the magnitude of the shortfall overall our results speak to the robust performance of relatively simple market mechanisms and associated incentive systems in resolving resource allocation problems within firms

simple cost sharing contracts we extend rogerson s 2003 intriguing analysis of the performance of simple procurement contracts to consider settings where the supplier s innate production cost is not necessarily distributed uniformly although the simple contract that rogerson analyzes performs remarkably well when the smaller cost realizations are relatively likely it can perform poorly when the larger cost realizations are relatively likely we show that in all settings under consideration though a fairly simple pair of contracts one that involves linear cost sharing and one that involves full cost reimbursement can always secure more than 73 of the gain achieved with a fully optimal contract

efficient migration and redistribution abstract it has often been noted that the brain drain may be abetted by highly progressive tax systems in the regions which are likely sources for emigration by those with the most income earning potential this paper presents the case in favour of such policies the underlying assumption here is that there are productivity differences between regions and that emigration of the most skilled workers from less productive regions increases the overall value of national output the problem lies in sharing these gains with the less skilled workers left behind in the low productivity region if national governments can transfer income among regions but if the transfers cannot be targeted to particular individuals then there is a trade off between equity and efficiency generous transfers redistribute the gains but tend to impede efficient migration since prospective migrants will only emigrate if their earnings net of all fiscal transfers and net of migration costs are higher in the destination region greater tax progressivity in the source region helps relax a constraint and make the trade off less difficult

anniversary article a perspective on asymmetric information incentives and intrafirm resource allocation the paper asymmetric information incentives and intrafirm resource allocation by harris kriebel and raviv was published in the june 1982 issue ofmanagement science in this article written as part of this journal s 50 year anniversary celebration we highlight the significance of the harris et al paper for research in managerial accounting we first formulate and solve a continuous version of the harris et al model to illustrate the key assumptions and findings of their paper we then review several strands of the resource allocation literature in managerial accounting that have taken their inspiration either directly or indirectly from the work of harris et al

raising taxes through equalization a simple theory suggests that a common form of federal horizontal equalization grants should cause subnational governments to levy higher tax rates distorting local tax bases and so increasing federal transfers to test this i examine canadian provincial tax policies in the 1972 2002 period consistent with the theory provinces respond to expansions of equalization transfers by increasing their own tax rates i estimate that on average tax rates in grant receiving provinces were substantially and significantly higher as a consequence of the transfer formula jel classification h21 une theorie simple suggere qu une forme usuelle d octrois federaux de perequation horizontale devrait entrainer les gouvernements sub nationaux a imposer de plus hauts taux d imposition modifiant ainsi les bases de fiscalite locale et ce faisant accroissant les transferts federaux pour mettre au test cette hypothese on examine les politiques fiscales des provinces canadiennes pour la periode entre 1972 et 2002 d une maniere qui semble supporter l hypothese les provinces ont repondu a un accroissement des transferts de perequation en accroissant leur propre taux d imposition on estime que les taux moyens d imposition dans les provinces qui recoivent des transferts sont plus eleves de maniere substantielle et significative en raison de la formule de transferts

taxation and deadweight loss in a system of intergovernmental transfers intergovernmental transfer programs in many federal systems including canada attempt to equalize differences in subnational jurisdictions tax capacities on the basis of the so called representative tax system rts it is shown that rts equalization grants effectively compensate subnational governments for a portion of the deadweight loss associated with taxes and consequently the grants may tend to increase the distortionary tax rates chosen by subnational governments this may be the case even when equalization is confined to tax bases that themselves are nondistortionary such as the taxation of pure economic rents

asymmetric information incentives and intrafirm resource allocation this paper considers the question how should a firm allocate a resource among divisions when the productivity of the resource in each division is known only to the division manager obviously if the divisions as represented by their managers are indifferent among various allocations of the resource the headquarters can simply request the division managers to reveal their private information on productivity knowing that the managers have no incentive to lie the resource allocation problem can then be solved under complete or at least symmetric information this aspect is a flaw in much of the recent literature on this topic i e there is nothing in the models considered which makes divisions prefer one allocation over another thus although in some cases elaborate allocation schemes are proposed and analyzed they are really unnecessary in the model we develop a division can produce the same output with less managerial effort if it is allocated more resources and effort is costly to the manager we further assume that this effort is unobservable by the headquarters so that it cannot infer divisional productivity from data on divisional output and managerial effort given these assumptions we seek an optimal resource allocation process our results show that certain types of transfer pricing schemes are optimal in particular if there are no potentially binding capacity constraints on production of the resource then an optimal process is for each division to choose a transfer price from a schedule announced by the headquarters division managers receive a fixed compensation minus the cost of the resource allocated to them at the chosen transfer price resources are allocated on the basis of the chosen transfer prices if there is a potentially binding constraint on resource production a somewhat more complicated but similar scheme is required

pigou tiebout property taxation and the underprovision of local public goods abstract pigou s proposition that the use of distorting taxes rather than neutral head taxes reduces public service levels is examined in this paper a simple model with a national system of competing local governments is utilized to demonstrate that the use of a distorting property tax on mobile capital decreases the level of residential public services the case where public services are an intermediate producer good is also considered

the rise in unemployment a multi country study one of the most remarkable features of recent economic history has been the remorseless rise in unemployment throughout the industrialized countries however while the trend to higher unemployment is universal the experience of individual countries also differs widely the increase is especially marked within the european community where unemployment rates rival those reached in the interwar years by contrast in the scandinavian countries and japan unemployment is lower and has risen very much less experience in the united states lies somewhere between these extremes and in the last few years unemployment there has fallen sharply

fiscal federalism revisited abstract we analyze how constitutional restrictions on tax bases within a federation affect the nature of pareto improving directions of tax reform and the design of optimal federal taxes we show that constraints on federal taxation entail production inefficiency at the optimum except under very restrictive circumstances in passing we show that using consumer prices as control variables a standard procedure in tax reform analysis rather than the taxes themselves leads to incorrect conclusions when not all taxes or prices can be controlled journal of economic literature classification numbers d61 h21 h70

redistribution fiscal competition and the politics of economic integration the paper examines the consequences of the economic integration of factor markets in a model with two countries that redistribute income among their residents the social benefits in each country are financed by a source based tax on capital which is democratically chosen by its inhabitants if either capital or labour is internationally mobile the countries engage in fiscal competition and the partial integration of capital or labour markets is detrimental to the countries redistributive ability a move from partial to full integration however may alleviate rather than intensify fiscal competition particularly if the two countries face sufficiently similar economic and political conditions in such a situation for example tax competition for mobile capital is softened as the labour market becomes more integrated and even vanishes if both factors are fully mobile as a result there is more redistribution in equilibrium and a majority of the population in each country is strictly better off copyright 2002 wiley blackwell

implementing tax coordination abstract this paper investigates whether tax competition can survive under tax coordination when information is private or nonverifiable we focus on a two jurisdiction model where capital can move across borders and where jurisdictions have different public good requirements but are otherwise identical in this setting coordination may call for a second best allocation supported by differentiated tax rates if however coordination must be achieved via a set of common rules that condition tax rates on jurisdictions choices the second best allocation may not be implementable we show that incentive compatibility requirements will generally affect not only the choice of coordinated rates in states where jurisdictions are different but also the choice of harmonized rates in states where jurisdictions have identical preferences for public consumption

fiscal capacity tax effort and optimal equalization grants in this paper we address the question how should the tax burden in a feder ation be distributed across the different jurisdictions so that the social cost of providing government services is minimized using optimal tax theory we derive formulas for the optimal equalization grants that equalize the social marginal cost of raising revenue across all provinces we show how the optimal equalization grants are related to a measure of tax effort based on the marginal cost of public funds and a measure of fiscal capacity that takes into account the elasticity of the tax base and its substitutability with other tax bases

a bargaining model of tax competition abstract this paper develops a model in which competing governments offer financial incentives to induce individual firms to locate within their jurisdictions equilibrium is described under three specifications of the supplementary taxes there is no misallocation of capital under two of these specifications and there might or might not be capital misallocation under the third this result contrasts strongly with that of the standard tax competition model which does not allow governments to treat firms individually that model finds that competition among governments almost always leads to capital misallocation

attachment to home and efficient purchases of population in a fiscal externality economy abstract this paper examines the efficiency properties of an economy characterized by strategically competing regions and individuals with varying degrees of attachment to home in an otherwise standard fiscal externality setting regional authorities may make interregional transfers in purchasing preferred populations however there is a range of distributions of resources over which neither region makes transfers nevertheless all equilibrium allocations resulting from the nash behavior of regional authorities including those that involve no transfers are efficient therefore in contrast to the standard conclusions of the fiscal externality literature there is no efficiency role for a central authority

tax competition rent seeking and fiscal decentralization abstract the present paper provides a basis for evaluating fiscal decentralization of expenditure and tax responsibilities by encompassing the literature on tax competition and rent seeking both tax and rent seeking competitions are conceived of as being wasteful and self defeating we find that rent seeking activities account for political distortions which may be mitigated in the process of fiscal decentralization while tax competition results in economic distortions associated with decentralization welfare evaluation should be based on the balance of the political gain and the economic cost

inter jurisdictional competition for firms regions inhabited with an immobile population of disabled and able individuals compete to attract mobile firms that provide jobs the redistributive goal of regional governments is to support the disabled who cannot work able individuals may work be involuntary unemployed because of frictions in the labor market or choose to be voluntary unemployed labor force participation decisions depend on regional redistributive policies both the size of workforce and tax on firms affect profits and therefore firms location decisions allowing regions to engage in tax competition may be efficient if regions cannot tax firms they compete by implementing inefficient redistributive policies

institutions capital stock and wage setting in spain this article confronts two distinct perspectives of the labour market the institutionalist view highlighting equilibrium and labour market institutions and the chain reaction theory emphasizing dynamics and the growth drivers role in labour market performance we consider the ratio of public to private capital stock as a growth driver relevant to the labour market provide different economic rationales for this ratio to exert a negative influence in wage setting and explore its empirical relevance in the context of a wage setting curve for spain comprising the standard variables there are two main results first several institutional variables taken to be critical to explain unemployment in the mainstream literature are not relevant for the spanish wage setting curve second there is a negative and significant influence of the ratio of public to private capital stock which is robust to different specifications of the wage setting equation

jeux sans frontieres tax competition and tax coordination when countries differ in size closer international integration is putting increasing pressure on existing national tax structures this paper uses a simple two country model to address a range of consequent policy concerns focusing particularly on the role of country size differences in size exacerbate the inefficiency from noncooperative behavior harming both countries the smaller country loses from harmonization to any tax rate between those set in the noncooperative equilibrium but both countries gain from the imposition of a minimum tax anywhere in that range the fully optimal response to freer cross border trade however may be to do nothing jel h20 h77

overlapping soft budget constraints abstract our paper identifies a potential problem with decentralization at a time when its virtues are widely extolled we show that responsibility for equalization at multi levels within a decentralized federation creates an overlapping equalization policy that can worsen fiscal discipline contrary to qian and roland 1998 we also show in our set up that fiscal competition among regional rescuers does not act as a commitment device to harden the local budget constraint

labour market institutions and wage setting evidence for oecd countries the main channel through which labour market institutions are supposed to work in affecting unemployment is through their effects on the key parameters of the wage curve in particular labour market institutions may have both a direct wage push or level effect i e change the level of the real wage for any given level of the unemployment rate and productivity and an indirect slope effect i e change the responsiveness of the real wage to the unemployment rate the question this article addresses is whether there is any evidence that these transmission mechanisms were at work in a group of 20 organization for economic co operation and development oecd countries over the period 1960 to 1999 the analysis is accomplished in two steps pooled mean group pmg estimates of a wage equation including unemployment productivity and a set of wage push institutions are first obtained allowing only a subset of institutional coefficient to be homogeneous while leaving the unemployment and other coefficients

on the consequences of government objectives for economies with mobile populations abstract we compare the efficiency and social welfare properties of equilibria resulting from different governmental objectives in a federal system with a mobile population the objectives considered are total utility average utility representative resident s utility and profit maximization the representative resident approach is unique in that it depends only on utility it yields the best efficient allocation from the perspective of a government s residents average utility yields an efficient allocation that non residents prefer both the profit maximizing and total utility approaches may lead to inefficient allocations we also show that the representative resident approach is socially preferred to a total utility approach