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Vertical Externalities Revisited: New Results with Public Inputs and Unit Taxation

Diego Martínez-López ()
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Diego Martínez-López: Universidad Pablo de Olavide

Hacienda Pública Española, 2018, vol. 225, issue 2, 11-30

Abstract: This paper studies the provision of public inputs in a federal system. We use a model with vertical tax and expenditure externalities to analyze the efficiency of equilibria under different settings, particularly Nash and Stackelberg equilibria. Our results discuss some findings from the previous literature. First, both vertical externalities are interrelated each other. Second, the condition for production efficiency in the public sector becomes irrelevant to assess optimality. And third, the replication of the second-best outcome by the federal government with limited policy instruments crucially depends on the states’ reaction function.

Keywords: Fiscal federalism; vertical externality; productive public spending. (search for similar items in EconPapers)
JEL-codes: H2 H4 H7 (search for similar items in EconPapers)
Date: 2018
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Handle: RePEc:hpe:journl:y:2018:v:225:i:2:p:11-30