Discussion Paper Details

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Title: Peripheral Diversity: Transfers versus Public Goods

Author(s): Klaus Desmet, Ignacio Ortuño-Ortín and Shlomo Weber

Publication Date: June 2016


Programme Area(s): Public Economics

Abstract: This paper advances the hypothesis that in societies that suffer from center-periphery tension it is harder to agree on public goods than on transfers. After micro-founding a new peripheral diversity index, it puts forth a simple theory in which the cost of public goods increases with peripheral diversity and tax compliance decreases with overall diversity. It then empirically explores the relation between public goods provision, transfers, peripheral diversity and overall diversity. Consistent with the theory, we find that higher levels of peripheral diversity are associated with less provision of public goods, but more transfers, whereas higher levels of overall diversity have a negative association with transfers. Public goods and transfers are therefore substitutes in their reaction to a change in peripheral diversity.

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Bibliographic Reference

Desmet, K, Ortuño-Ortín, I and Weber, S. 2016. 'Peripheral Diversity: Transfers versus Public Goods'. London, Centre for Economic Policy Research.