Fiscal Capacity Equalization and Economic Efficiency

Jeffrey Petchey () and Sophia Levtchenkova ()

International Center for Public Policy Working Paper Series, at AYSPS, GSU from International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University

Abstract: Fiscal capacity equalisation, at least of the type implemented in Australia, is shown to link regions together through a grant distribution formula that creates an incentive for regions to act strategically in order to influence the size of their grant. This behaviour distorts the provision of local public goods away from optimal levels of provision by changing regional perceptions of the marginal benefit from local public good provision. In addition, the inter-regional transfer of income that occurs with equalisation leads to inefficiency in the spatial allocation of mobile factors of production. As a result, we conclude that equalisation may create economic inefficiency, and lead to a lower level of social welfare.

Keywords: fiscal equalisation; revenue needs; expenditure needs; local public goods; Nash equilibrium; labour mobility; fiscal externalities; economic rents. (search for similar items in EconPapers)
Pages: 27 pages
Date: 2004-11-01
New Economics Papers: this item is included in nep-pbe and nep-ure
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
http://icepp.gsu.edu/files/2015/03/ispwp0415.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ays:ispwps:paper0415

Access Statistics for this paper

More papers in International Center for Public Policy Working Paper Series, at AYSPS, GSU from International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University Contact information at EDIRC.
Bibliographic data for series maintained by Paul Benson ().