Working Paper: CEPR ID: DP2662
Authors: Jürgen von Hagen; Ralf Hepp
Abstract: We provide empirical estimates of the risksharing and redistributive properties of fiscal equalization among the states of the German federation. Fiscal equalization serves as a mechanism to insure state budgets against asymmetric revenue shocks, but provides almost no insurance against regional income shocks. Equalization responds only weakly to income differentials but strongly to tax revenue differentials across states. A further result is that the correlation of state tax revenues with state GDPs has declined over time. This may reflect a weakening in state tax efforts in response to the adverse incentive effects of fiscal equalization.
Keywords: Fiscal Federalism; Monetary Union; Regional Risk Sharing
JEL Codes: E42; E63; F33; F42
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Fiscal Equalization Transfers (H77) | Asymmetric GDP Shocks (F41) |
| Asymmetric GDP Shock (F41) | Fiscal Equalization Transfers (H77) |
| Fiscal Equalization Transfers (H77) | State Tax Revenue Shocks (H71) |
| State Tax Revenue Shocks (H71) | Fiscal Equalization Transfers (H77) |
| Fiscal Equalization Transfers (H77) | Per Capita GDP Differences (P19) |
| Fiscal Equalization Transfers (H77) | State Tax Revenue Differences (H71) |