Fiscal Equalization

Each endogenous variable in the model is a function of the exogenous For later discussion, it is useful to explore this in variables and parameters. more detail for one of the endogenous variables, for example the grant to State i. In this regard, one can define from (6) the per capita grant to a State as where F = [s N] is a vector of variables determined by the federal government, P = [p, p,] is a vector of the local public good prices, CGC = [I, pi c] is a vector of variables determined by the CGC and S = lq, q,] is the strategy set of the two States. Within F, the variable s is determined by the federal government. The total federal population N is determined by things such as the birth and death rate, but also by international migration and hence, to some extent, the population policy of the federal government. Within the vector CGC, the variables yi , pi, c are all determined by the CGC, while the public good provision levels within S are determined by the States. As discussed below, we assume that each State perceives s, N, public good prices and the CGC variables (except the adjustment term c) to be exogenously given. This is reasonable since in practice the States have no impact on s and only a marginal impact on the CGC variables.

These original essays highlight the state of knowledge in intergovernmental transfer design. They represent creative new thinking about challenging policy issues and offer useful options for policy makers. Five specific themes are covered in separate sections. They include:

The fundamental nature and objectives of equalization grants and their consequences on efficiency and equity;

The appropriate institutional setting for the design and implementation of equalization grant systems;

The challenges in the design of formulas with limited data availability for recurrent and capital purposes;

The coordination of equalization grants with other related policies;

The political economy behind equalization transfers.

 

"There is a genuine need for this book; it will become a 'benchmark' reference.  I am impressed with its content, organization, readability, and fresh thematic approach."

Robert D. Ebel, The World Bank