Working Paper: CEPR ID: DP3625
Authors: Ignatius J. Horstmann; Kimberley Ann Scharf
Abstract: Along with the rise in income inequality in the US, there is evidence of 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.
Keywords: fiscal federalism; jurisdiction formation; private provision of public goods
JEL Codes: H20; H70
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Increased income inequality (D31) | Decentralized government structure (H10) |
| Decentralized government structure (H10) | Local jurisdictions that are more income-homogeneous (H73) |
| Increased income inequality (D31) | Increased reliance on private provision of public goods (H42) |
| Decreased tax base (H79) | Increased reliance on private provision of public goods (H42) |
| Increased income inequality (D31) | Increased segregation along income lines (R23) |
| Increased segregation along income lines (R23) | Increased reliance on private provision of public goods (H42) |