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      Fiscal efficiency, redistribution and welfare

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      Author
      Neyapti, B.
      Bulut-Cevik, Z. B.
      Date
      2014-08
      Source Title
      Economic Modelling
      Print ISSN
      0264-9993
      Electronic ISSN
      1873-6122
      Publisher
      Elsevier
      Volume
      41
      Issue
      C
      Pages
      375 - 382
      Language
      English
      Type
      Article
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      Abstract
      The expanding literature on fiscal decentralization (FD) emphasizes the role of institutional mechanisms for FD's welfare effects. We analyze the welfare effects of FD in case of a fiscal transfer mechanism that punishes inefficiency in tax collection and compensates for local income deficiency. In addition, a portion of transfers is earmarked for investment. Given a level of FD and these rules, the representative local government chooses its tax collection effort to maximize local utility. The solution of the model reveals that the stricter the redistributive rule, the higher are steady-state fiscal efficiency and welfare. While the effectiveness of the redistributive parameters increases with centralization of the revenue pool, it decreases with the tax rate. Both welfare and income distribution, on the other hand, improve with the degree of revenue centralization and the tax rate. Besides, fiscal efficiency and redistribution decrease with investment-earmarked transfers. © 2014 Elsevier B.V.
      Keywords
      Fiscal Efficiency
      Redistribution
      Transfer Rule
      Permalink
      http://hdl.handle.net/11693/12515
      Published Version (Please cite this version)
      http://dx.doi.org/10.1016/j.econmod.2014.05.034
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      • Department of Economics 649
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