It has been suggested that fiscal federalism is a good way to induce decentralized entities to behave parsimoniously, but this has been largely criticized in the literature, in particular because of the Common-Pool problem. In this paper, we present an extra facet of the latter problem. We present a simple theoretical model confirmed by empirical evidence suggesting that vertical imbalance induces governments to substitute redistributive spending for non-distributive expenditures. This drives fiscal policies to be less efficient in reducing income inequality.
|Publication status||Published - 2006|