When Transparency Goes Against Efficiency: Fiscal Equalization in a Context of Firm and Household Mobility

摘要

The purpose of this paper is to investigate how the mobil ity of households and firms affects economic efficiency and whether a transparent system of equalization payments can be efficiency-enhancing. When local governments choose their fiscal policy taking into account the impact the policy will have on migration, the decentralized equilibrium does not result in a socially efficient allocation: central govern ment intervention is required. However, assuming the trans parency of fiscal equalization-that is local governments know the transfer formulas as advocated by the Council of Europe-no system of equalization transfers is able to ensure economic efficiency. The system has to combine a transparent transfer with a grant the formula of which is not known to local governments.