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On regional integration, fiscal income, and GDP per capita

Yutao Han and Zhen Song
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Yutao Han: Department of Economics, University of International Business and Economics

No 600, CEMA Working Papers from China Economics and Management Academy, Central University of Finance and Economics

Abstract: This paper investigates the economic impacts of regional integration on a small jurisdiction in a dynamic fiscal competition environment. The tradeoffs between the economic benefits and the loss of policy flexibility resulting from integration are analyzed from the perspectives of fiscal revenue and GDP per capita. Our results show that the small jurisdiction's loss of flexibility in policy making can dominate the other effects of integration. Specifically, if the small jurisdiction's efficiency in providing public inputs is originally sufficiently high (low), regional integration always reduces (improves) its net revenue, independently of the extent of efficiency improvement due to integration. However, when the small jurisdiction's efficiency is originally intermediate, the impact on net revenue crucially depends on the magnitude of the efficiency effect. Our analysis also characterizes the tradeoffs resulting from integration between policy flexibility on the one hand and capital mobility and fiscal equalization on the other.

Keywords: regional integration; policy flexibility; fiscal revenue; differential game (search for similar items in EconPapers)
JEL-codes: R12 H87 C73 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-geo and nep-ure
Date: 2017-08
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