The Tragedy of the Commons or the Curse of Federalism. Luxembourg Income Study Working Papers, Maxwell School of Citizenship and Public Affairs, Syracuse University N.420

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.