Equalization and the Decentralization of Revenue-Raising in a Federation
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We study federal economies in which regional governments have
responsibility for delivering public services and redistributive
objectives apply. The implications of these for the assignment of
revenue-raising instruments and fiscal transfers, both vertical and
horizontal, are considered. Models of heterogeneous regions of varying
degrees of complexity and generality are constructed. For each case, we
determine what fiscal instruments must be given to the regions and what
intergovernmental transfers must be made in order that the social optimum
is achieved. With heterogenous households and regions, the social optimum
can be decentralized by making regions responsible for redistribution and
implementing equalization transfers that depend on the number of
households of each type. Copyright 2003 Blackwell Publishing Inc..