DP2662 Regional Risksharing and Redistribution in the German Federation

Author(s): Ralf Hepp, Jürgen von Hagen
Publication Date: January 2001
Keyword(s): Fiscal Federalism, Monetary Union, Regional Risk-Sharing
JEL(s): E42, E63, F33, F42
Programme Areas: International Macroeconomics, Public Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=2662

We provide empirical estimates of the risksharing and redistributive properties of fiscal equalization among the states of the German federation. Fiscal equalization serves as a mechanism to insure state budgets against asymmetric revenue shocks, but provides almost no insurance against regional income shocks. Equalization responds only weakly to income differentials but strongly to tax revenue differentials across states. A further result is that the correlation of state tax revenues with state GDPs has declined over time. This may reflect a weakening in state tax efforts in response to the adverse incentive effects of fiscal equalization.