Fiscal efficiency, redistribution and welfare

Date
2014-08
Authors
Neyapti, B.
Bulut-Cevik, Z. B.
Advisor
Supervisor
Co-Advisor
Co-Supervisor
Instructor
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
Journal Title
Journal ISSN
Volume Title
Series
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.

Course
Other identifiers
Book Title
Keywords
Fiscal Efficiency, Redistribution, Transfer Rule
Citation
Published Version (Please cite this version)