Equalization and the Decentralization of Revenue-Raising in a Federation
Scholarly Editions
Overview
Overview
abstract
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 heterogenous 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 inter-governmental 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.
