When Transparency Goes Against Efficiency: Fiscal Equalization in a Context of Firm and Household Mobility

Authors


  • Pascale Duran-Vigneron, EconomiX, University of Paris West Nanterre La Defense, Paris, France (p.duranvigneron@gmail.com).

  • This work was supported by grants from Région Ile-de-France. I would like to thank Marie-Laure Breuillé, Nelly Exbrayat, Guy Gilbert, Marco Runkel, Alain Trannoy, and the two referees for their valuable comments and suggestions. I am particularly indebted to Gareth Myles for his very helpful attention.

Abstract

The purpose of this paper is to investigate how the mobility of households and firms affects economic efficiency and whether a transparent system of equalization payments can be efficiency-enhancing. When local governments choose their fiscal policy taking into account the impact the policy will have on migration, the decentralized equilibrium does not result in a socially efficient allocation: central government intervention is required. However, assuming the transparency of fiscal equalization—that is local governments know the transfer formulas as advocated by the Council of Europe—no system of equalization transfers is able to ensure economic efficiency. The system has to combine a transparent transfer with a grant the formula of which is not known to local governments.

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