A principal-agent model of altruistic redistribution, with some implications for fiscal federalism
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Abstract
Economists may have taken an unduly limited view of the role that subnational governments (states, counties, cities) ought to play in the redistribution of income. When information is incomplete, subnational redistribution may reduce agency costs. A principal-agent model is proposed, in which taxpayers want to redistribute only to the deserving poor, where deservingness is defined in terms of an unobservable, effort, and an imperfectly observed stochastic shock. In the resulting equilibria, the taxpayer’s optimal benefit strategies are shown to be inconsistent with uniformity of benefit in a large country.
Keywords
Principal-agent Fiscal federalism Welfare systems Information Incomplete information Altruism Deserving poorJEL classification
I30 D64 D82 H7Preview
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