Can Federal Grants Mitigate Social Competition?

Posted: 2 Jul 2008

See all articles by Jacques H. Drèze

Jacques H. Drèze

affiliation not provided to SSRN

Charles Figuieres

Catholic University of Louvain (UCL) - Center for Operations Research and Econometrics (CORE); Université de Polynésie Française

Jean Hindriks

University of London - School of Economics and Finance

Abstract

The European economic integration leads to increasing mobility of factors, thereby threatening the stability of social transfer programs. This article investigates the possibility to achieve by means of voluntary matching grants both the optimal allocation of factors and the optimal level of redistribution in the presence of factor mobility. We use a fiscal competition model a la Wildasin (1991) in which states differ in their technologies and preferences for redistribution. We first investigate a simple process in which the federal authority progressively raises the matching grants to the district choosing the lowest transfer and all districts respond optimally to the resulting change in transfers all around. This process is shown to increase efficiency of both production and redistribution. However, it does not guarantee that all districts gain, nor that an efficient level of redistribution is attained. Assuming complete information among districts, we derive the willingness of each district to match the contribution of other districts and we show that the aggregate willingness to pay for matching rates converges to zero when both the efficient level of redistribution and the efficient allocation of factors are achieved. We then describe an adjustment process for the matching rates that will lead districts to the efficient outcome and guarantee that everyone will gain.

Keywords: Fiscal federalism, adjustment process, matching grants, social competition

JEL Classification: H23, H70

Suggested Citation

Drèze, Jacques H. and Figuieres, Charles and Hindriks, Jean, Can Federal Grants Mitigate Social Competition?. CESifo Economic Studies, Vol. 53, Issue 4, pp. 596-617, 2007, Available at SSRN: https://ssrn.com/abstract=1154458 or http://dx.doi.org/ifm020

Jacques H. Drèze (Contact Author)

affiliation not provided to SSRN

Charles Figuieres

Catholic University of Louvain (UCL) - Center for Operations Research and Econometrics (CORE) ( email )

34 Voie du Roman Pays
1348 Louvain-la-Neuve, 1348
Belgium

Université de Polynésie Française

Jean Hindriks

University of London - School of Economics and Finance ( email )

Mile End Road
London, E1 4NS
United Kingdom
+44 20 7882 7807 (Phone)
+44 20 8983 3580 (Fax)

HOME PAGE: http://www.dc.eclipse.co.uk/hindriks.html

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