Does competition for capital discipline governments? The role of fiscal equalization

Yongzheng Liu

International Tax and Public Finance, 2014, vol. 21, issue 3, 345-374

Abstract: This paper examines how a fiscal equalization system affects the disciplining effect of competition for capital among heterogeneous regions in a decentralized economy. I build a model in which regions that are heterogeneous in initial endowments try to attract capital by competing public input that enhances the productivity of capital; meanwhile, a fiscal equalization system is imposed by the central government to reduce regional disparities in fiscal capacity. The key prediction, borne out in data from the German equalization system, is that while competition for capital strengthens discipline in the well-endowed regions, it weakens discipline in the poorly endowed regions. However, a conventional equalization transfer scheme, common to many countries, can be effective in correcting the distortion driven by the heterogeneity of initial endowments across competing regions. Copyright Springer Science+Business Media New York 2014

Keywords: Fiscal competition; Disciplining effect; Fiscal equalization; System GMM; H54; H72; H73; H77; C23 (search for similar items in EconPapers)
Date: 2014
References: Add references at CitEc
Citations: View citations in EconPapers (11)

Downloads: (external link)
http://hdl.handle.net/10.1007/s10797-013-9272-1 (text/html)
Access to full text is restricted to subscribers.

Related works:
Working Paper: Does Competition for Capital Discipline Governments? The Role of Fiscal Equalization (2014)
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:kap:itaxpf:v:21:y:2014:i:3:p:345-374

Ordering information: This journal article can be ordered from
http://www.springer. ... ce/journal/10797/PS2

DOI: 10.1007/s10797-013-9272-1

Access Statistics for this article

International Tax and Public Finance is currently edited by Ronald B. Davies and Kimberly Scharf

More articles in International Tax and Public Finance from Springer, International Institute of Public Finance Contact information at EDIRC.
Bibliographic data for series maintained by Sonal Shukla (sonal.shukla@springer.com) and Springer Nature Abstracting and Indexing (indexing@springernature.com).