Pascale Duran-Vigneron, EconomiX, University of Paris West Nanterre La Defense, Paris, France (email@example.com).
When Transparency Goes Against Efficiency: Fiscal Equalization in a Context of Firm and Household Mobility
Article first published online: 27 JAN 2012
© 2012 Wiley Periodicals, Inc.
Journal of Public Economic Theory
Volume 14, Issue 1, pages 99–130, February 2012
How to Cite
DURAN-VIGNERON, P. (2012), When Transparency Goes Against Efficiency: Fiscal Equalization in a Context of Firm and Household Mobility. Journal of Public Economic Theory, 14: 99–130. doi: 10.1111/j.1467-9779.2011.01535.x
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.
- Issue published online: 27 JAN 2012
- Article first published online: 27 JAN 2012
- Received March 18, 2010; Accepted August 15, 2010.
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.