Optimal Regional Redistribution Under Asymmetric Information

46 Pages Posted: 13 Feb 2001

See all articles by Massimo Bordignon

Massimo Bordignon

Universita Cattolica; CESifo (Center for Economic Studies and Ifo Institute)

Paolo Manasse

Università degli Studi di Bologna - Department of Economics; IGIER, Bocconi University; International Monetary Fund (IMF) - Fiscal Affairs Department

Guido Tabellini

Bocconi University - Department of Economics; Bocconi University - IGIER - Innocenzo Gasparini Institute for Economic Research; Center for Economic Studies and Ifo Institute for Economic Research (CESifo)

Multiple version iconThere are 2 versions of this paper

Date Written: July 1996

Abstract

This paper studies optimal redistribution among two different regions in a federal state. Regional governments supply local public goods financed by distorting local taxes. They have better information on their tax bases than the federal government. We model this both as an adverse selection problem relating to the size of local tax bases and/or as a moral hazard problem relating to local tax enforcement. Moral hazard alone does not affect the first-best redistribution rule, which is a lump sum transfer from the rich to the poor region. In all other cases the optimal transfer rule involves a lump sum tax on the rich regions and a premium for fiscal effort by the poor regions, with the transfer falling short of the first-best level. In the equilibrium with moral hazard and adverse selection, tax evasion occurs only in the poor region, even though the possibility of lax tax enforcement benefits the rich and harms the poor region because it reduces equilibrium redistribution.

Keywords: Asymmetric information, fiscal federalism, intergovernmental grants, regional redistribution formula

JEL Classification: H23

Suggested Citation

Bordignon, Massimo and Manasse, Paolo and Tabellini, Guido, Optimal Regional Redistribution Under Asymmetric Information (July 1996). CEPR Discussion Paper No. 1437, Available at SSRN: https://ssrn.com/abstract=291179

Massimo Bordignon (Contact Author)

Universita Cattolica ( email )

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CESifo (Center for Economic Studies and Ifo Institute)

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Paolo Manasse

Università degli Studi di Bologna - Department of Economics ( email )

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IGIER, Bocconi University

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International Monetary Fund (IMF) - Fiscal Affairs Department ( email )

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Guido Tabellini

Bocconi University - Department of Economics ( email )

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Italy

Bocconi University - IGIER - Innocenzo Gasparini Institute for Economic Research ( email )

Via Roentgen 1
Milan, 20136
Italy

Center for Economic Studies and Ifo Institute for Economic Research (CESifo)

Poschinger Str. 5
Munich, DE-81679
Germany

HOME PAGE: http://www.CESifo.de

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