Laboratory Federalism with Public Funds Sharing

Ana Ania and Andreas Wagener

Vienna Economics Papers from University of Vienna, Department of Economics

Abstract: The theory of laboratory federalism hypothesizes that, in a decentralized multi-jurisdictional system, policies follow an evolutionary learning process with innovation and imitation. This paper studies the role of public funds sharing in such a setting. As a guiding framework we consider a model of decentralized, rich-to-poor redistribution with labor mobility. Uncorrected learning dynamics here lead to a drastic erosion of the welfare state. Suitably designed public funds sharing can correct this failure and may even restore efficiency. Surprisingly, the necessary properties of the sharing scheme for efficiency in the learning model are the same as those that make decentralized Nash play efficient (and vice versa). Public funds sharing, thus, is a powerful corrective device in fiscally decentralized settings for a variety of behavioral modes of government interaction.

JEL-codes: C73 H75 H77 (search for similar items in EconPapers)
Date: 2019-02
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Journal Article: Laboratory federalism with public funds sharing (2021)
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