Contractual Fiscal Equivalence Versus Geographical Fiscal Equivalence

Abstract

This work extends the contractual procedure, normally used in therelationships among persons, to intergovernmental relationshipsnamely those among local jurisdictions. This changing inperspective challenges the efficiency criterion based ongeographical fiscal equivalence; in fact the level of equilibriumdoes not depend on the level of the public good provided perse; it rather depends on the fiscal system, on the position ofthe median voter, on whether interjurisdictional mobility iseither favoured or forbidden, and finally on whether the centralgovernment uses transfers either for redistributive purposes oras payments of the services provided by local jurisdictions. Inparticular, the paper shows that if two jurisdictions of the samelevel are allowed to have contractual relationships (horizontalrelationships) the more efficient of the two can sell the servicealso to the less efficient, so reducing citizens' unit costs.