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NONLINEAR INCOME TAXATION AND MATCHING GRANTS IN A FEDERATION WITH DECENTRALIZED IN‐KIND TRANSFERS *
Author(s) -
Blomquist Sören,
Micheletto Luca
Publication year - 2009
Publication title -
international economic review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 2.658
H-Index - 86
eISSN - 1468-2354
pISSN - 0020-6598
DOI - 10.1111/j.1468-2354.2009.00540.x
Subject(s) - decentralization , redistribution (election) , economics , fiscal federalism , matching (statistics) , federalism , public economics , transfer (computing) , government (linguistics) , microeconomics , redistribution of income and wealth , nonlinear system , public good , computer science , mathematics , market economy , linguistics , statistics , philosophy , physics , quantum mechanics , politics , parallel computing , political science , law
We extend to a fiscal federalism setting the literature on redistributive in‐kind transfers in the presence of nonlinear income taxation. Local governments have a cost advantage, motivating decentralization of the in‐kind transfer. The cost structure varies across regions, and the central government cannot observe which region is which. We show that decentralized in‐kind transfers can, in this setting, be an even more important instrument for relaxing self‐selection constraints, thus, helping redistribution, than in single‐government models. We characterize the optimal marginal tax rates and matching grants. The grants have a very different structure than the one derived in earlier studies.