Abstract - Economics Research Reports
The New Federalism: Distributional Conflict, Voluntarism, and Segregation
By Ignatius J. Horstmann (Universities of Western Ontario and Toronto) and Kimberley A. Scharf (University of Warwick)
Along with the rise in income inequality in the U.S., we have observed a simultaneous move toward fiscal devolution and increased government reliance on private provision of public goods. This paper argues that these phenomena are related. We describe a model of jurisdiction and policy formation in which the structure of government provision is endogenous and public good provision levels are determined by a political process that can exploit private motives for voluntary giving. The model predicts that an increase in income inequality leads to decentralization, with local jurisdictions becoming more income-homogeneous than the population as a whole. This reduction in local income heterogeneity, combined with a reduced tax base, results in increased reliance by government on private provision.
JEL Classification: H2; H7
Keywords: fiscal federalism; private provision of public goods; jurisdiction formation