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How Much Fiscal Equalisation?

Author

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  • Robert Fenge
  • Jakob von Weizsäcker

Abstract

We treat fiscal equalisation as an insurance device against regional tax revenue variance. This insurance comes at the price of a moral hazard: regional government will spend too little effort on the development of the local tax base. In a simple bargaining model with two identical regions we show that less than total fiscal equalisation combined with lump sum transfers will be optimal. Taking a step back to the constitutional bargaining behind some veil of ignorance which determines the fallback position for later negotiations, we show that writing total fiscal equalisation into the constitution will be optimal.

Suggested Citation

  • Robert Fenge & Jakob von Weizsäcker, 2000. "How Much Fiscal Equalisation?," CESifo Working Paper Series 366, CESifo.
    • Handle: RePEc:ces:ceswps:_366
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    References listed on IDEAS

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    1. Huber, Bernd & Lichtblau, Karl, 1998. "Konfiskatorischer Finanzausgleich verlangt eine Reform," Wirtschaftsdienst – Zeitschrift für Wirtschaftspolitik (1949 - 2007), ZBW - Leibniz Information Centre for Economics, vol. 78(3), pages 142-147.
    2. Huber, Bernd & Lichtblau, Karl, 1998. "Konfiskatorischer Finanzausgleich verlangt eine Reform," Munich Reprints in Economics 19398, University of Munich, Department of Economics.
    3. Bernd Huber & Christian Baretti & Karl Lichtblau, 2000. "A Tax on Tax Revenue. The Incentive Effects of Equalizing Transfers: Evidence from Germany," CESifo Working Paper Series 333, CESifo.
    4. Lockwood, Ben, 1999. "Inter-regional insurance," Journal of Public Economics, Elsevier, vol. 72(1), pages 1-37, April.
    5. Michael Smart, 1998. "Taxation and Deadweight Loss in a System of Intergovernmental Transfers," Canadian Journal of Economics, Canadian Economics Association, vol. 31(1), pages 189-206, February.
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