Interregional transfers, group loyalty and the decentralization of redistribution

Abstract

We study the decentralization of redistributive taxation in a political economy model assuming regional heterogeneity regarding both group identity and average income. If a centralized system permits a beneficial pooling of national resources, it might also decrease the degree of solidarity in the society. With no group loyalty, centralization Pareto-dominates decentralization even when regions are not identical. Furthermore, increased heterogeneity need not increase the relative efficiency of decentralization. If regions are equally rich, centralization Pareto-dominates decentralization whenever group loyalty is not perfect. Finally, centralization is always more efficient than decentralization even when allowing for interregional transfers.JEL Codes: H77, D64, H23

Preferences for Inter-Regional Redistribution

“…An overlapping literature on regional autonomy movements focuses more on the economic optimality of autonomy or secession (Bolton & Roland, 1997; Bordignon, Manasse, & Tabellini, 2001; Flamand, 2014). In much of this literature, the underlying theoretical models explaining the amount of redistribution across regions are partially based on assumptions about citizen preferences over these outcomes.…”

“…The fiscal federalism literature focuses mostly on the institutional determinants of why some federations redistribute among regions more than others (Beramendi, 2012;Rodden, 2010) One general finding of this literature is that "initially unequal" federations redistribute less than initially equal federations and that countries often do not adopt the most efficient forms of decentralization as predicted by classic economic models (Oates, 1999). 2 An overlapping literature on regional autonomy movements focuses more on the economic optimality of autonomy or secession (Bolton & Roland, 1997;Bordignon, Manasse, & Tabellini, 2001;Flamand, 2014). In much of this literature, the underlying theoretical models explaining the amount of redistribution across regions are partially based on assumptions about citizen preferences over these outcomes.…”

A Dynamic Theory of Secession

“…In the conict literature only a handful of papers have explicitly modelled the incentives for secession. Morelli and Rohner (2015) have built a model allowing for both nationwide and secessionist conict, showing that the most conict-prone 7 See also Flamand (2015). 8 Related to this, Bordignon and Brusco (2001) analyze whether constitutions should include provisions for agreed potential secessions, arguing that if peaceful secession is not foreseen, the society may incur ex-post important eciency losses due to conict.…”