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Vertical Externalities Revisited: New Results with Public Inputs and Unit Taxation

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  • Diego Martínez-López

    (Universidad Pablo de Olavide)

Abstract

This paper studies the provision of public inputs in a federal system. We use a model with vertical tax and expenditure externalities to analyze the efficiency of equilibria under different settings, particularly Nash and Stackelberg equilibria. Our results discuss some findings from the previous literature. First, both vertical externalities are interrelated each other. Second, the condition for production efficiency in the public sector becomes irrelevant to assess optimality. And third, the replication of the second-best outcome by the federal government with limited policy instruments crucially depends on the states’ reaction function.

Suggested Citation

  • Diego Martínez-López, 2018. "Vertical Externalities Revisited: New Results with Public Inputs and Unit Taxation," Hacienda Pública Española / Review of Public Economics, IEF, vol. 225(2), pages 11-30, June.
    • Handle: RePEc:hpe:journl:y:2018:v:225:i:2:p:11-30
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    References listed on IDEAS

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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Fiscal federalism; vertical externality; productive public spending.;
    All these keywords.

    JEL classification:

    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • H4 - Public Economics - - Publicly Provided Goods
    • H7 - Public Economics - - State and Local Government; Intergovernmental Relations

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