Factor Mobility and Redistributive Policy: Local and International Perspectives

Abstract

The literature of local public economics, club theory and fiscal federalism has been distinguished by its attention to the problems of fiscal policy in an open-economy setting. The actual or potential movement of goods and services, households, and business activity across jurisdictional boundaries raise a wide variety of issues for public economics. First and most importantly, the openness of jurisdictional boundaries implies the existence of margins of behavioural response to fiscal policy that do not arise in traditional closed-economy public economics. The possibility of cross-border shopping, capital flows, and movements of workers and households across jurisdictional boundaries all affect the allocative and distributional effects of tax and expenditure policies. The openness of the market environment within which local fiscal policies are implemented also naturally raises questions of interjurisdictional fiscal interactions. A taxpayer who leaves one jurisdiction must arrive somewhere else, businesses that are attracted by a favourable fiscal climate in one locality might have been established elsewhere, and local public services that improve environmental quality, reduce crime, or raise the level of health care in one jurisdiction may benefit residents of other localities. These and many other forms of interactions lead one to ask whether the fiscal policies pursued by independent jurisdictions are collectively optimal, in some sense, or whether there are potential gains from coordination of policy.

Much of the work on this chapter was done while the author was visiting the Public Economics Division of the World Bank’s Policy Research Department; some of the work was also done during a visit to the Economic Policy Research Unit of the Copenhagen Business School. I am grateful to PRDPE and to EPRU for their support and hospitality, but bear all responsibility for the content of the chapter, including any errors or omissions. I also thank Peter Birch Sørensen for comments on a previous version of the chapter.