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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