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Endogenous free riding and the decentralized user-fee financing of spillover goods in a n-region economy

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  • Clemens Fuest
  • Martin Kolmar

Abstract

The paper analyzes the strategic effects of decentralized user-fee and enforcement policies for the financing of interregional spillover goods. We derive the equilibrium pricing and enforcement rules for a n-region economy. We show that under mild conditions on the pattern of substitution between spillover goods and contrary to the 2-region case, the decentralized equilibrium cannot be Pareto improved by coordinated policy changes. However, decentralized equilibria are suboptimal from the point of view of utilitarian welfare. We characterize the direction of the distortion for this case. The regions’ incentives for user-fee enforcement are ambiguous in general. With only two regions and if regions only charge non-residents, however, there is overinvestment in user-fee enforcement in the decentralized equilibrium. For the case of a Tullock enforcement function and linear demand for the spillover goods we show that welfare is u-shaped in a parameter that measures the technological advantage of user-fee enforcement. Copyright Springer Science+Business Media, LLC 2013

Suggested Citation

  • Clemens Fuest & Martin Kolmar, 2013. "Endogenous free riding and the decentralized user-fee financing of spillover goods in a n-region economy," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 20(2), pages 169-191, April.
    • Handle: RePEc:kap:itaxpf:v:20:y:2013:i:2:p:169-191
    DOI: 10.1007/s10797-012-9219-y
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    References listed on IDEAS

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    Cited by:

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    More about this item

    Keywords

    Public goods; Club goods; Contests; Fiscal federalism; D74; H41; H70; K42;
    All these keywords.

    JEL classification:

    • D74 - Microeconomics - - Analysis of Collective Decision-Making - - - Conflict; Conflict Resolution; Alliances; Revolutions
    • H41 - Public Economics - - Publicly Provided Goods - - - Public Goods
    • H70 - Public Economics - - State and Local Government; Intergovernmental Relations - - - General
    • K42 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Illegal Behavior and the Enforcement of Law

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