Regional policy interaction in a federal economy

Bodhisattva Sengupta ()
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Bodhisattva Sengupta: Indian Institute of Technology Guwahati

Indian Economic Review, 2023, vol. 58, issue 1, No 4, 103 pages

Abstract: Abstract A key question in fiscal federalism is the determination of horizontal policy interdependence at the regional levels. In this paper, we explore the relationship between policies chosen by different regions within a federation in the presence of expenditure spillover and federal redistribution. In a federal economy, provinces produce public goods. These public goods exhibit inter-jurisdictional spillover. A province’s marginal utility from ‘own public good’ may increase (complementarity, C) or decrease (substitutability, S) in neighboring provinces’ public good production. In addition, federal authority transfer funds to the provinces. The fund can either be a targeted grant (to the public good production) or a general-purpose grant. Jurisdictions bear the cost of raising the local revenues. We employ the notion of subgame perfect equilibrium in which provinces (as the first mover) choose their taxes. As the second mover, the central authority determines the grants conditional on local taxes. Given this setup, we examine how interactions between different modes of grants, public good spillover, and cost parameters determine the slope of provincial reaction functions. We demonstrate that tackling the problem on a case-by-case basis is better.

Keywords: Federalism; Public goods; Spillover; Complementarity; Substitutability (search for similar items in EconPapers)
JEL-codes: H7 R5 (search for similar items in EconPapers)
Date: 2023
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DOI: 10.1007/s41775-023-00185-w

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