Journal Article

Interregional Redistribution and Mobility in Federations: A Positive Approach

Anke S. Kessler, Nico A. Hansen and Christian Lessmann

in The Review of Economic Studies

Published on behalf of Review of Economic Studies Ltd

Volume 78, issue 4, pages 1345-1378
Published in print October 2011 | ISSN: 0034-6527
Published online March 2011 | e-ISSN: 1467-937X | DOI: https://dx.doi.org/10.1093/restud/rdr003
Interregional Redistribution and Mobility in Federations: A Positive Approach

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The paper studies the effects and the determinants of interregional redistribution in a model of residential and political choice. We find that paradoxical consequences of interjurisdictional transfers arise if people are mobile: while self-sufficient regions are necessarily identical with respect to policies and average incomes in our model, interregional redistribution always leads to the divergence of regional policies and per capita incomes. Thus, interregional redistribution prevents interregional equality. At the same time, however, transfers may allow for more interpersonal equality among the inhabitants of each region. The voting population may therefore in a decision over the fiscal constitution deliberately implement such a transfer scheme to foster regional divergence. Empirical evidence from panel data from OECD countries and Canadian provinces is consistent with the theory.

Keywords: Interregional transfers; Fiscal federalism; Regional inequality; H71; H73

Journal Article.  15082 words.  Illustrated.

Subjects: Public Economics

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