An Analysis of the Effects of Fiscal Equalisation in a Two-Region Simulation Model

Nicolaas Groenewold () and Alfred J Hagger
Additional contact information
Nicolaas Groenewold: Department of Economics, The University of Western Australia
Alfred J Hagger: School of Economics, University of Tasmania

No 05-04, Economics Discussion / Working Papers from The University of Western Australia, Department of Economics

Abstract: This paper is concerned primarily with the economic and welfare consequences of federal redistributive grants. We use a model which has two regions, each with households, firms and regional governments as well as a federal government. The households, firms and regional governments are all optimizers – households maximize utility, firms maximize profits and we assume that regional governments are empire-builders in that they choose their expenditure and tax levels so as to maximise total expenditure – the size of their empire. Labour is free to move between regions in response to utility differences and does so until such differences have been eliminated. Inter-regional migration, interregional trade flows and federal government redistribution are the main sources of interconnectedness between the two regions. The model is linearised in log-differences and simulated using a calibration based on Australian state-level data. We find that the welfare effect of intergovernmental transfers is trivial but that all other variables of interest change substantially – consumption, employment, prices, taxes, wages, output and government expenditure. Finally, the signs of the effects of a federal transfer are not affected by the empire-building behaviour of regional governments although the magnitude of the effects is generally dampened.

Pages: 28 pages
Date: 2005
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://ecompapers.biz.uwa.edu.au/paper/PDF%20of%2 ... 05_04_Groenewold.pdf First version, 2005 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:uwa:wpaper:05-04

Access Statistics for this paper

More papers in Economics Discussion / Working Papers from The University of Western Australia, Department of Economics Contact information at EDIRC.
Bibliographic data for series maintained by Sam Tang ().