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Horizontal versus vertical fiscal equalization: the assignment problem

Author

Listed:
  • Georg Anetsberger

    (University of Hagen
    Bardehle Pagenberg)

  • Volker Arnold

    (University of Hagen)

Abstract

We analyze a model in which the central government can establish a vertical equalization scheme, whereas the regional governments can set up a horizontal equalization scheme. The two levels of government decide in different chronological order. It turns out that, regardless of the timing, the central government always prevails—horizontal equalization does not take place. However, the subgame-perfect equilibrium is only Pareto-efficient, if the central government acts as a Stackelberg leader. Moreover, if the goal of achieving equality in living conditions across the regions is pursued in the model economy, the only suitable candidate for reaching this goal is vertical equalization.

Suggested Citation

  • Georg Anetsberger & Volker Arnold, 2019. "Horizontal versus vertical fiscal equalization: the assignment problem," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 26(2), pages 357-380, April.
    • Handle: RePEc:kap:itaxpf:v:26:y:2019:i:2:d:10.1007_s10797-018-9499-y
    DOI: 10.1007/s10797-018-9499-y
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    More about this item

    Keywords

    Federations; Fiscal equalization; Labor mobility; Regional public goods;
    All these keywords.

    JEL classification:

    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • H41 - Public Economics - - Publicly Provided Goods - - - Public Goods
    • H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism

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