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

journal contribution
posted on 2023-05-17, 01:28 authored by Groenewold, N, Hagger, AJ
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.

History

Publication title

The Annals of Regional Science

Volume

41

Pagination

353-374

ISSN

0570-1864

Department/School

TSBE

Publisher

Springer-Verlag

Place of publication

175 Fifth Ave, New York, USA, Ny, 10010

Repository Status

  • Restricted

Socio-economic Objectives

Macroeconomics not elsewhere classified

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