DP4576 Interregional Redistribution and Mobility in Federations: A Positive Approach

Author(s): Nico Hansen, Anke Kessler
Publication Date: August 2004
Keyword(s): fiscal federalism, interregional transfers, migration, redistribution
JEL(s): H71, H73
Programme Areas: Public Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=4576

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 can 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. As we show, however, it at the same time allows for more interpersonal equality among the inhabitants of each region. For this reason, the voting population may in a decision over the fiscal constitution deliberately implement such a transfer scheme to foster regional divergence.