Laboratory federalism with public funds sharing

Ana Ania and Andreas Wagener

Economic Inquiry, 2021, vol. 59, issue 3, 1047-1065

Abstract: Laboratory federalism hypothesizes that decentralization fosters innovation and learning in multijurisdictional systems, conducing to good policies. We discuss this using evolutionary stability, focusing in this paper on public funds sharing. In a model of rich‐to‐poor redistribution with labor mobility, where policy choices based on relative success lead to drastic welfare erosion, suitably designed sharing schemes can restore efficiency. Their necessary properties are the same as in a Nash equilibrium, showing they are a powerful corrective device for different modes of government interaction. Two drawbacks appear: reduced accuracy due to large multiplicity and a tendency to overly reward inefficiently high redistribution.

Date: 2021
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https://doi.org/10.1111/ecin.12971

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