SFB 303 Discussion Paper No. A - 498

Author: Hansen, Nico A., and Anke S. Kessler
Title: Income Redistribution in Federal Systems
Abstract: The paper investigates income redistribution in a federation of politically independent, democratic jurisdictions among which households are mobile. We prove existence and characterize equilibria under various assumptions on the time structure of political and residential choice and the degree of voter sophistication. If voters are myopic and do not foresee policy-induced migration, there may be considerable redistribution in equilibrium. Federation members converge with respect to tax rates and per capita incomes although individual preferences over policies differ and inter-regional transfers are ruled out. We demonstrate that voter myopia can be rationalized by a sequential formulation in which households must decide on their location before they take part in the political choice process. If voters are sophisticated, no redistribution is the unique equilibrium outcome. This case is shown to be equivalent to a situation where voters can relocate after an election.
Keywords: Income Redistribution, Fiscal Federalism, Mobility, Majority Voting
JEL-Classification-Number: D70, H10, H70
Creation-Date: November 1996
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