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A political economy model of the vertical fiscal gap and vertical fiscal imbalances in a federation

Bev Dahlby () and Jonathan Rodden ()
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Jonathan Rodden: Stanford University

No 2013/18, Working Papers from Institut d'Economia de Barcelona (IEB)

Abstract: We develop a political economy model of intergovernmental transfers. Vertical fiscal balance occurs in a federation when the ratio of the marginal benefit of the public services provided by the federal and provincial governments is equal to their relative marginal costs of production. With majority voting in national elections, the residents of a "pivotal province" will determine the level of transfers such that the residents of that province achieve a vertical fiscal balance in spending by the two levels of government. We test the predictions of the model using Canadian time series data and cross-section data for nine federations.

Keywords: Fiscal federalism; vertical fiscal imbalance; fiscal gap (search for similar items in EconPapers)
JEL-codes: H71 H73 H77 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-for, nep-pbe and nep-pol
Date: 2013
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