Matthias Wrede

Shared Tax Sources and Public Expenditures

This paper deals with a specific vertical assignment of public functions in a federation: Two levels of government share both the same tax source and expenditure on a productivity increasing public service. We consider surplus maximizing Leviathan governments which provide public services in order to increase their potential tax base. The Nash equilibrium is characterized by overtaxation and relative to surplus maximization—depending on whether or not the public goods are sufficiently complementary with the entire tax base—either underprovision or overprovision of the public service. The implications of these results, in terms of welfare and potential use for earmarking taxes are also considered.

Fiscal equalisation: Principles and an application to the European Union

Abstract.The paper derives a normative model for partial fiscal equalisation based on a number of axioms and makes special allowance for the existence of a specific fiscal need in the jurisdictions. A simple version of this idealised equalisation scheme relates net contributions to the equalisation funds to deviations of a jurisdiction’s gross income from average gross income and a jurisdiction’s specific needs from average specific needs. The theoretical model is then empirically tested for the case of the European Union using data from 1986–97. It is found that most restrictions of the model appear to hold, in particular, relatively richer countries contribute more and those with greater fiscal needs, approximated by the importance of the agricultural sector, pay less. However, in the EU, an adjustment of net payments to changes in the actual importance of the specific fiscal need for a country is lacking.

Yardstick Competition to Tame the Leviathan

This papers analyzes the disciplining role of elections under asymmetric information when voters have to rely on relative performance evaluation to tame the Leviathan. If elections are held in different regions, voters are able to reduce political rents below the Leviathan outcome by carrying out adequate retrospective voting strategies. The paper compares a multi-candidate model to a two-party system with either independent or coordinated policies in the various regions. In general, voters are worse off in the two-party system. However, it is shown that the power of voters is strengthened in some sense by the two-party system if each party has a uniform leadership which determines policies in all regions.

Tragedy of the fiscal common?: Fiscal stock externalities in a Leviathan model of federalism *

The paper deals with vertical tax competition between self-interested governments in a dynamic environment. In a federation, competition between the federal and the state governments arises when tax sources are not separated but pooled. Since dynamic inefficiencies will be stressed, the focus is on fiscal stock externalities rather than on flow externalities. The paper shows that the Leviathans in a federation tax the fiscal common resource more extensively than the single Leviathan in a unitary state. Furthermore, the positive impact of political stability on public consumption of the fiscal common will be discussed.

The Income Splitting Method: Is it Good for Both Marriage Partners?

Abstract This paper analyzes how deviating from individual taxation affects married couples. The focus is on time allocation, on investment in family-specific human capital and on distribution of income within the family. Two insights are discussed in detail. First, the distribution of tax-reduction gains due to the income splitting system depends on whether the family has been started or not. After marriage, joint taxation increases redistribution among family members. Second, although joint taxation reduces the tax burden of the family, it might harm the marriage partner that is more productive in household production provided that potential marriage partners foresee the effects of joint filing on the time allocation within the family.

Household mobility and the moderate leviathan: Efficiency and decentralization

Abstract Household mobility forces regional welfare maximizing governments – which are only interested in the well-being of their own residents – to provide local public goods efficiently and to make interregional transfers which lead to a socially efficient population distribution. On the one hand, this paper shows that in the presence of perfect household mobility, policy makers, which are neither entirely benevolent nor wholly self-serving, use their instruments to achieve internal and external efficiency even if the number of regions is small. On the other hand, it is shown that regional moderate Leviathans choose an inefficient amount of “wasteful” expenditure.

Cultural identity, mobility, and decentralization

Regionalism and efforts to reinforce regional cultural identities are on the rise in Europe. Examples can be found in Spain, Belgium, Italy, Great Britain, and other countries. Regional governments may invest in cultural identity due to beneficial effects on social capital. However, this comes at the cost of cultural adaption costs for non-natives. We propose a simple model of regional culture investments in a federation to investigate such a trade-off. The model shows that uncoordinated cultural policies generally lead to oversupply of regional culture, and that richer regions face higher incentives to invest in regional culture. We conclude that only mild assumptions are necessary to make a strong case for regional cultural integration.

Standardization of Intermediate Goods and International Trade

This paper analyzes the relationship between standardization of intermediate inputs and international trade. We employ a two-country, general equilibrium model with differentiated manufacturing goods. Production of manufacturing goods requires specific intermediate inputs, which can be either specialized or standardized. Standardization and the pattern of trade are determined endogenously in our model. In this framework we derive the effects of trade integration, that is, a decline in trading costs for intermediate goods, on the equilibrium outcome.

Uniform Pricing Versus Mill Pricing

This paper analyzes the coexistence of different pricing strategies. The purpose is to discuss how firms that are limited to uniform pricing affect the outcome of price competition among mill-price-setting firms. Price competition among (three) firms that are restricted to mill pricing is analyzed within the classic Hotelling framework and uniform-price-setting firms are considered as first movers. If uniform-price-setting firms deliver any good, they effectively separate mill-price-setting firms from each other. Finally, it is shown that price competition among first movers strengthens the effects of cross-type price competition. Copyright Blackwell Publishing, Inc. 2003

Wages, Rents, Unemployment, and the Quality of Life: A Consistent Theory‐Based Measure

Combining a spatial equilibrium model with a matching unemployment model, this paper analyzes the regional quality of life when wages, rents, and unemployment risk compensate for local amenities and disamenities. In particular, the paper shows for quasi-linear utility that the effects of any amenity on wages and unemployment rates are of opposite sign. Additionally, the wage rate and the labor market tightness increase and the unemployment ratio decreases in reaction to an increase in the level of an amenity if the amenity is marginally more beneficial to producers than to consumers per unit of land. Based on the model, quality of life of average mobile workers in West German counties is estimated.