Sharing Budgetary Austerity Under Free Mobility and Asymmetric Information: An Optimal Regulation Approach to Fiscal Federalism

39 Pages Posted: 7 Nov 2005

See all articles by Marie-Laure Breuillé

Marie-Laure Breuillé

University of Paris X Nanterre

Robert J. Gary-Bobo

Université Paris I Panthéon-Sorbonne; CREST ENSAE; CESifo (Center for Economic Studies and Ifo Institute); Centre for Economic Policy Research (CEPR)

Date Written: October 2005

Abstract

In the present article, Tiebout meets Laffont and Tirole in the land of Fiscal Federalism. We use a non-trivial Principal-Multi-Agent model to characterize the optimal intergovernmental grant schedule, when the cost of local public goods depends on hidden characteristics and actions of local governments, and under citizen free mobility. We show that local governments earn informational rents, and how optimal local taxes, public good production levels and land prices are jointly distorted at the second-best optimum, as a consequence of free mobility and asymmetric information. The effect of informational asymmetries is to decrease the average production of public goods and to increase the inter-jurisdictional variance of taxes and public-good production.

Keywords: asymmetric information, Principal-Agent model, public budget deficits, free-mobility equilibrium, fiscal federalism

JEL Classification: D72, D82, H7

Suggested Citation

Breuillé, Marie-Laure and Gary-Bobo, Robert J., Sharing Budgetary Austerity Under Free Mobility and Asymmetric Information: An Optimal Regulation Approach to Fiscal Federalism (October 2005). CESifo Working Paper Series No. 1559, Available at SSRN: https://ssrn.com/abstract=843387 or http://dx.doi.org/10.2139/ssrn.843387

Marie-Laure Breuillé

University of Paris X Nanterre ( email )

Room G301, Building G
92001 Nanterre Cedex, 92001
France

Robert J. Gary-Bobo (Contact Author)

Université Paris I Panthéon-Sorbonne ( email )

17, rue de la Sorbonne
Paris, IL 75005
France

CREST ENSAE ( email )

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Malakoff Cedex, 1 92245
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+33141176031 (Phone)

HOME PAGE: http://www.crest.fr/ses.php?user=3042

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

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Munich, DE-81679
Germany

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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