Free Mobility and the Regional Authority in a Federation

Abstract

<p>This dissertation contains four primary chapters. Chapter 1 is an introduction. Chapter 2 examines the efficiency properties of a federation characterized by strategically competing regions and freely mobile homogeneous individuals. Previous analyses of this economy have concluded that achieving a Pareto optimal allocation will require intervention by a national authority. This chapter makes one basic point; the Nash equilibrium of regional authority behavior is Pareto optimal. The implication is that there is no role for a national authority in either providing interregional transfers or correcting for decentralized provision of public goods. Free mobility induces strong incentive equivalence between regional authorities. The Nash equilibrium involves Samuelson public good provision and regions purchasing a preferred population distribution with interregional transfers.</p> <p>Chapter 3 extends the analysis to generalized specifications for public goods. The new specification allows for an analysis of the spillover of public good literature and consideration of impure public goods. Previous analyses of this economy have concluded that a Pareto optimal allocation will require intervention by a national authority in either taking over the function of public good provider or offering matching grants to subsidize regional public good provision. I prove that in an environment of free mobility the Nash equilibrium is Pareto optimal.</p> <p>Chapter 4 is an extension to a heterogeneous population. The population is modeled as heterogeneous in both preferences and endowments. Enough similarity in preferences and complementarity between labour types in production is assumed to allow abstraction from sorting equilibria. The conclusion is that when regional authorities are not in conflict on normative value judgments, the Nash equilibrium is Pareto optimal. When regional authorities are in conflict the Nash equilibrium does not exist. Once again, this result means that this literature provides no role for a national authority; such intervention is either unnecessary or unhelpful.</p> <p>Chapter 5 discusses two versions of the fiscal externality. The first version is the widely accepted market failure view. It is maintained that the free mobility of individuals between regions involves a market failure and thus is a source of inefficiency in regional economics. The chapter concludes that this view is mistaken. This first version of the fiscal externality is a pecuniary externality and thus simply a reflection of efficiently operating markets. Inefficient outcomes are traced to assumed inappropriate regional authority behavior. The second more recent version of the fiscal externality argues that in an environment of perfect capital mobility, a regional authority taxing capital causes capital flight, which generates an external economy for other authorities by increasing their tax base. This chapter also concludes that this view is mistaken. Capital taxation by an authority involves internal costs (loss of tax base) and is thus not an externality. Inefficient outcomes are traced to authorities with fewer instruments than targets. Chapter 6 provides a conclusion.</p>