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Optimal Regional Redistribution under Asymmetric Information

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Listed:
  • Massimo Bordignon
  • Paolo Manasse
  • Guido Tabellini

Abstract

This paper studies optimal redistribution among two different regions in a federal state. Regional governments supply local public goods financed with distorting local taxes. They have better information on their tax bases than the federal government. We model this both as an adverse selection problem on the size of local tax bases and/or as moral hazard problem on 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.
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Suggested Citation

  • Massimo Bordignon & Paolo Manasse & Guido Tabellini, 2001. "Optimal Regional Redistribution under Asymmetric Information," American Economic Review, American Economic Association, vol. 91(3), pages 709-723, June.
    • Handle: RePEc:aea:aecrev:v:91:y:2001:i:3:p:709-723
    Note: DOI: 10.1257/aer.91.3.709
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    More about this item

    JEL classification:

    • R12 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - Size and Spatial Distributions of Regional Economic Activity; Interregional Trade (economic geography)
    • H73 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Interjurisdictional Differentials and Their Effects

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