Working Paper

Political Economy

Petra Ens

2009/16: Tax competition and equalization: the impact of voluntary cooperation on the efficiency goal

Literature has long learned about the welfare improving effect of equalization in tax competition environments. By setting incentives to local authorities, public spending becomes efficient in spite of relying on a mobile resource as the tax base. This paper proves that this result cannot hold when local players have influence on the shape of the transfer system. A bargaining concerning equalization may change the incentives arising from equalization.