Abstract
When productivity shocks across regions are less-than-perfectlycorrelated, there are gains from federation, even if the regionsare identical ex ante. For the federation to provide insurancefor these productivity shocks, it must introduce some sort of“equalizing” transfer programme among regions. But any suchtransfer programme induces a form of moral hazard as well, ifregions still have some control over their own policies. Oneof the implications of this moral hazard is that the progressivityof the overall (regional together with federal) tax system willbe increased when the federal transfer programme is expanded.
Similar content being viewed by others
References
Alesina, A., and R. Perotti. (1995). "Economic Risk and Political Risk in Fiscal Unions." Working paper #4992, National Bureau of Economic Research.
Besley, T., and S. Coate. (1997). "An Economic Model of Representative Democracy." Quarterly Journal of Economics112, forthcoming.
Bucovetsky, S. (1990). "Majority Rule in Multi-Dimensional Spatial Models." Social Choice and Welfare7, 353–368.
Bucovetsky, S. (1991). "Choosing Tax Rates and Expenditure Levels Using Majority Rule." Journal of Public Economics46, 113–131.
Eichengreen, B. (1993). "European Monetary Integration." Journal of Economic Literature31, 3, 1321–1357.
Grandmont, J.-M. (1978). "Intermediate Preferences and Majority Rule." Econometrica46, 317–330.
Ingram, J. (1959). "State and Regional Payment Mechanisms." Quarterly Journal of Economics73, 4, 619–632.
Johnson, A. (1988). "Income Redistribution in a Federal System." American Economic Review78, 3, 570–573.
Mundell, R. (1961). "A Theory of Optimum Currency Areas." American Economic Review51.
Oates, W. (1972). Fiscal Federalism. New York: Harcourt Brace Jovanovich.
Osborne, M., and A. Slivinski. (1996). "A Model of Political Competition with Citizen Candidates." Quarterly Journal of Economics111, 1, 65–96.
Persson, T., and G. Tabellini. (1996). "Federal Fiscal Constitutions: Risk Sharing and Moral Hazard." Econometrica 64, 623–646.
Rogoff, K. (1985). "The Optimal Degree of Commitment to an Intermediate Monetary Target." Quarterly Journal of Economics100, 1169–1190.
Smart, M. (forthcoming). "Taxation Incentives and Deadweight Loss in a System of Intergovernmental Transfers." Canadian Journal of Economics.
Sorensen, B., P. Asdrubali, and O. Yosha. (1995). "Channels of Interstate Risksharing: US 1963–1990." Working paper #1995-4, EPRU, Copenhagen Business School.
Stigler, G. (1957). "The Tenable Range of Functions of Local Government." In Joint Economic Committee, Federal Expenditure Policy for Growth and Stability, pp. 213–219. Washington: U.S. Government Printing Office.
Wildasin, D. (1991). "Income Redistribution in a Common Labor Market." American Economic Review81, 4, 757–775.
Wildasin, D., and J. Wilson. (1995). "Risky Local Tax Bases: Risk-Pooling vs. Rent Capture." Working paper.
Author information
Authors and Affiliations
Rights and permissions
About this article
Cite this article
Bucovetsky, S. Insurance and Incentive Effects of Transfers among Regions: Equity and Efficiency. International Tax and Public Finance 4, 463–483 (1997). https://doi.org/10.1023/A:1008660931233
Issue Date:
DOI: https://doi.org/10.1023/A:1008660931233