Fiscal Transfers in the Spatial Economy
39 Pages Posted: 23 Apr 2018
Date Written: April 2018
Many countries operate pronounced fiscal equalization schemes that shift tax revenue across jurisdictions. We use a general equilibrium model with multiple asymmetric regions, costly trade and labor mobility to carve out the aggregate implications of this policy. Calibrating the model for Germany, we find that it indeed delivers smaller spatial economic disparities across regions. This comes at the cost of lower national output, however, because activity is diverted away from core cities and towards remote areas with low productivity. But despite this output loss, fiscal transfers may still raise national welfare, because they effectively countervail over-congestion in large cities.
Keywords: Fiscal equalization, migration, regional transfers, spatial economics
JEL Classification: F15, R11
Suggested Citation: Suggested Citation