Fiscal Equalization and Yardstick Competition
26 Pages Posted: 20 Dec 2006
Date Written: December 2006
A multi-jurisdictional system is thought to improve, through yardstick competition, accountability. At the same time equalization programs, a common feature of multi-jurisdictional systems, are thought to be a prerequisite for both efficiency of the internal market and the equity objective of the equal treatment of equals. This paper shows that such programs, by reducing the information context of comparisons across jurisdictions, introduce perverse fiscal incentives and thus reduce accountability. The consequence of this is that equilibrium rent-taking increases with the intensity of equalization transfers.
Keywords: equalization transfer programs, fiscal capacity, rent-seeking, fiscal federalism
JEL Classification: D72, H77
Suggested Citation: Suggested Citation