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How Much Fiscal Equalization? A Constitutional Approach

Robert Fenge and Jakob von Weizsäcker ()

Journal of Institutional and Theoretical Economics (JITE), 2001, vol. 157, issue 4, 623-633

Abstract: We treat fiscal equalization between two states as an insurance device against regional tax revenue variations. This insurance comes at the price of a moral hazard: regional governments will spend too little effort fostering and exploiting their local tax base. We show that total fiscal equalization is desirable as a constitutional provision if states are allowed to negotiate less than total fiscal equalization later on with the constitution serving as the fallback position.

JEL-codes: H72 H77 (search for similar items in EconPapers)
Date: 2001
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