Fiscal Federalism in the presence of impure public goods

Rosella Levaggi

STUDI ECONOMICI, 2007, vol. 2007/91, issue 91, 5-23

Abstract: Fiscal Federalism in the Presence of Impure Public Goods (by Rosella Levaggi) - ABSTRACT: The traditional theory for fiscal federalism assumes that the lower tier is more efficient in producing local public goods because of information asymmetry, while on the finance side Central Government might be more efficient in raising resources that will then be distributed through grants-in-aid. This scheme does not take into account that services produced at local level are usually impure public goods and that Central Government might want to pursue other objectives instead of a straight maximisation of social welfare. Based on the modelling structure is based on Lancaster?s characteristic approach as applied to impure public goods by Cornes and Sandler (1994), the model developed in this paper allows to derive grants-in aid distribution formulae in this environment and a set of rules that allows to establish when fiscal federalism is a superior alternative to decentralisation.

Keywords: Flypaper Effect; Grants-in-aid; Re-election (search for similar items in EconPapers)
Date: 2007
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