Interregional Redistribution and Regional Disparities: How Equalization Does (Not) Work

Anke Kessler and Christian Lessmann

No 8133, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: Do inter-governmental transfers such as equalization grants reduce interregional disparities? This paper studies both theoretically and empirically the impact of interregional redistribution on interregional inequality. We set up a model with residential choice and equalization grants between regions, and show that interregional transfer payments prevent convergence promoting migration. We test our model in using cross-country data and panel data for 22 highly developed OECD countries. The evidence suggests a positive relationship between interregional transfers and regional disparities both across countries and over time from 1982 to 2000. In the cross-section data, we find that countries with higher levels of interregional redistribution in the past show a subsequent increase in interregional disparity, while countries with lower levels of grants and transfers show less divergence or even convergence. The panel reveals a similar picture: countries who have increased their sub-governmental transfers and grants have experienced more divergence (less convergence) over time than countries who have lowered their transfers.

Keywords: Interregional transfers; Redistribution evidence; Regional disparity (search for similar items in EconPapers)
JEL-codes: H71 H73 R58 (search for similar items in EconPapers)
Date: 2010-12
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Citations: View citations in EconPapers (9)

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