FEAS RESEARCH E-BULLETIN FEAS E-BULLETIN DECEMBER 2016 | Page 7

Author: Çevik, Zeynep Burcu
Title: Welfare Effects of Intergovernmental Transfers: Equity vs. Efficiency
Supervisor: Assist. Prof. Dr. Ömer Kağan Parmaksız
Department: Economics
Date: May 2016
Abstract: Intergovernmental transfers, that are significant source of income for state and local
governments, are needed to annihilate the fiscal imbalances. This dissertation aims to investigate the
welfare effects of an intergovernmental transfer rules in fiscally decentralized economies. The particular
linear redistribution rule used in this study takes into account two criteria: equity and efficiency. The
model consists of citizens, symmetric local governments and a central government, which are in a
strategic interaction. Our study is the first to include interactions between these agents under a
redistribution rule. So, this study focuses on Markov-perfect Nash equilibrium of this economy by a
continuum of households and governments that act sequentially. There exist public good spillovers
across regions and tax competition between local governments through mobile capital. Welfare is
compared among no-rule case and full–rule (equity and efficiency) case and also among no-equity case
and no-efficiency case. The results indicate that the welfare in full rule case is always higher than the
one in no rule case. Furthermore, for high levels of capital mobility, no efficiency case has higher welfare
level than no equity case. This implies that in case of high mobility government should give more weight
to equity case.

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