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Fiscal federalism and public inputs provision: vertical externalities matter

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  • Martí­nez-López, Diego

Abstract

This paper studies the provision of public inputs in a federal system. A vertical tax externality is also considered in a simple general equilibrium model used to analyze the efficiency of equilibria under different scenarios. The results show that the state provision of public inputs may affect ambiguously federal tax revenues, depending on the vertical tax externality, amongst others issues. Moreover, it is proved that achieving a second best allocation is not straightforward for a federal government that plays as Stackelberg leader. At this point, the state's reaction function becomes crucial when the design of vertical grants is restricted. JEL Classification: H2, H4, H7

Suggested Citation

  • Martí­nez-López, Diego, 2005. "Fiscal federalism and public inputs provision: vertical externalities matter," Working Paper Series 484, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:2005484
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    References listed on IDEAS

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    1. Esteller-More, Alex & Sole-Olle, Albert, 2001. "Vertical income tax externalities and fiscal interdependence: evidence from the US," Regional Science and Urban Economics, Elsevier, vol. 31(2-3), pages 247-272, April.
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    7. Dahlby, Bev & Wilson, Leonard S., 2003. "Vertical fiscal externalities in a federation," Journal of Public Economics, Elsevier, vol. 87(5-6), pages 917-930, May.
    8. Besley, Timothy J. & Rosen, Harvey S., 1998. "Vertical externalities in tax setting: evidence from gasoline and cigarettes," Journal of Public Economics, Elsevier, vol. 70(3), pages 383-398, December.
    9. Robin Boadway & Michael Keen, 1996. "Efficiency and the optimal direction of federal-state transfers," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 3(2), pages 137-155, May.
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    Cited by:

    1. Diego Martínez López, 2005. "On states’ behavior with equalization grants," Hacienda Pública Española / Review of Public Economics, IEF, vol. 174(3), pages 43-54, September.

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    More about this item

    Keywords

    fiscal federalism; productive public spending; vertical externality;
    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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