Tobin Meets Oates: Solidarity and the Optimal Fiscal Federal Structure (WP-10-05)
Xavier Calsamiglia, Teresa Garcia-Milà, and Therese McGuire
The authors explore the implications for the optimal degree of fiscal decentralization when people’s preferences for goods and services, which classic treatments of fiscal federalism (Oates, 1972) place in the purview of local governments, exhibit specific egalitarianism (Tobin, 1970), or solidarity. They find that a system in which the central government provides a common minimum level of the publicly provided good, and local governments are allowed to use their own resources to provide an even higher local level, performs better from an efficiency perspective relative to all other systems analyzed for a relevant range of preferences over solidarity.
Xavier Calsamiglia, Professor of Economics and Business, Universitat Pompeu Fabra and Barcelona GSE
Teresa Garcia-Milà,Professor of Economics and Business, Universitat Pompeu Fabra and Barcelona GSE
Therese McGuire, Professor of Management and Strategy, Kellogg; and Faculty Fellow, Institute for Policy Research, Northwestern University