Can Federal Grants Mitigate Social Competition? |
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Authors: | Dreze Jacques H; Figuieres Charles; Hindriks Jean |
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Institution: | *CORE, Voie du Roman Pays 34, B-1348 Louvain-la-Neuve, Belgium. e-mail: dreze{at}core.ucla.ac.be
INRA, UMR LAMETA. 2 place Viala. 34060 Montpellier cedex 01, France. e-mail: Charles.Figuieres{at}supagro.inra.fr
CORE, Department of Economics, Universite catholique de Louvain, Louvain-La-Neuve, Belgium. e-mail: hindriks{at}core.ucl.ac.be |
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Abstract: | The European economic integration leads to increasing mobilityof factors, thereby threatening the stability of social transferprograms. This article investigates the possibility to achieveby means of voluntary matching grants both the optimal allocationof factors and the optimal level of redistribution in the presenceof factor mobility. We use a fiscal competition model a la Wildasin(1991) in which states differ in their technologies and preferencesfor redistribution. We first investigate a simple process inwhich the federal authority progressively raises the matchinggrants to the district choosing the lowest transfer and alldistricts respond optimally to the resulting change in transfersall around. This process is shown to increase efficiency ofboth production and redistribution. However, it does not guaranteethat all districts gain, nor that an efficient level of redistributionis attained. Assuming complete information among districts,we derive the willingness of each district to match the contributionof other districts and we show that the aggregate willingnessto pay for matching rates converges to zero when both the efficientlevel of redistribution and the efficient allocation of factorsare achieved. We then describe an adjustment process for thematching rates that will lead districts to the efficient outcomeand guarantee that everyone will gain. (JEL Classification:H23, H70) |
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Keywords: | Fiscal federalism adjustment process matching grants social competition |
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