Federalism, Freedom of Movement, and Fiscal Equalization

Stefan Traub ()

No 2003-06, Economics Working Papers from Christian-Albrechts-University of Kiel, Department of Economics

Abstract: In this paper, we take up the question why a group of sovereign countries is willing to form a federation even if residents of the high-income region suspect potential immigrants to be net beneficiaries of the tax and transfer system. We argue that income uncertainty alone cannot satisfactorily explain the formation of federations, since in many existing and developing federations income differences are both large and persistent. In the model presented here remaining separated involves costs for the high-income region, which can be regarded as a proxy for the efficiency loss caused if mobile factors cannot reallocate. A fiscal equalization scheme that shares the resources saved by limiting costly migration between the regions can make both regions better off.

Keywords: Federalism; Migration; Fiscal Equalization (search for similar items in EconPapers)
JEL-codes: D63 D78 H40 H77 (search for similar items in EconPapers)
Date: 2003
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:cauewp:788

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