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The effects of fiscal equalisation in a model with endogenous regional governments: an analysis in a two-region numerical model

Citation

Groenewold, N and Hagger, AJ, The effects of fiscal equalisation in a model with endogenous regional governments: an analysis in a two-region numerical model, The Annals of Regional Science, 41, (2) pp. 353-374. ISSN 0570-1864 (2007) [Refereed Article]

DOI: doi:10.1007/s00168-006-0105-3

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. Private agents are (utility and profit) maximisers 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, inter-regional 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. © Springer-Verlag 2006.

Item Details

Item Type:Refereed Article
Research Division:Economics
Research Group:Applied Economics
Research Field:Urban and Regional Economics
Objective Division:Economic Framework
Objective Group:Macroeconomics
Objective Field:Macroeconomics not elsewhere classified
Author:Hagger, AJ (Dr Alfred Hagger)
ID Code:60920
Year Published:2007
Web of Science® Times Cited:4
Deposited By:Economics and Finance
Deposited On:2010-02-22
Last Modified:2011-11-28
Downloads:0

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