Ex-Post Redistribution in a Federation: Implications for Corrective Policy

Marko Köthenbürger
Authors registered in the RePEc Author Service: Marko Koethenbuerger

No 1754, CESifo Working Paper Series from CESifo

Abstract: This paper analyzes whether changes in the timing of equalizing transfers to state governments necessitate an adjustment in federal corrective policy. According to the existing literature (assuming an ex-ante choice of transfers), the corrective grant is equal to the marginal damage/benefit inflicted by externality generation. When the federal government accommodates state finances ex-post, the grant differs in formula from existing prescription. Allocative federal policy corrects state policy incentives twofold. It entails a correction for the distortion in the marginal benefit of state spending (as in earlier literature) and for the distortion in the marginal cost of public funds induced by the ex-post provision of transfers. The required grant rule is generically disproportionate to the equilibrium externality (even with lump-sum taxation). Furthermore, the ex-post provision of transfers is critical for the nature of the equilibrium inefficiency. Equalizing transfers at least partly internalize consumption spill-overs, but simultaneously establishes a new source of inefficiency. As a final result, the existing prescription for allocative federal policy continues to apply if the public good is pure.

Keywords: federalism; externality; corrective grant; equalization; commitment (search for similar items in EconPapers)
JEL-codes: D62 H10 H30 H70 (search for similar items in EconPapers)
Date: 2006
New Economics Papers: this item is included in nep-pbe
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Journal Article: Ex-post redistribution in a federation: Implications for corrective policy (2007)
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