Regional Investment and Individual Redistribution in a Federation

Sebastian Kessing and Benny Schneider

Volkswirtschaftliche Diskussionsbeiträge from Universität Siegen, Fakultät Wirtschaftswissenschaften, Wirtschaftsinformatik und Wirtschaftsrecht

Abstract: We study the strategic incentives of regional governments to allocate their budget to public investment and to public consumption expenditures against the background of an incentive-compatible redistribution policy set by the central government. Regional investment changes the productivity distribution in the economy, which affects the design of the optimal tax-transfer system by the central government. The strategic incentives can differ between rich and poor regions depending on the nature of the investment. Rich and poor regions both have strategic incentives to reduce investment which increases the productivity of all individuals in a region. For investment which only increases the productivity of a part of the population, rich regions have reduced investment incentives, whereas poor regions have increased strategic incentives to invest. Our results hint at potential benefits of appropriate differentiation of matching grants.

Keywords: optimal income taxation; regional investment; fiscal federalism (search for similar items in EconPapers)
JEL-codes: H21 H54 H72 H77 (search for similar items in EconPapers)
Pages: 18 pages
Date: 2014
New Economics Papers: this item is included in nep-pbe
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Persistent link: https://EconPapers.repec.org/RePEc:sie:siegen:168-14

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