Working Paper: CEPR ID: DP8133
Authors: Anke Kessler; Christian Lessmann
Abstract: Do inter-governmental transfers such as equalization grants reduce interregional disparities? This paper studies both theoretically and empirically the impact of interregional redistribution on interregional inequality. We set up a model with residential choice and equalization grants between regions, and show that interregional transfer payments prevent convergence promoting migration. We test our model in using cross-country data and panel data for 22 highly developed OECD countries. The evidence suggests a positive relationship between interregional transfers and regional disparities both across countries and over time from 1982 to 2000. In the cross-section data, we find that countries with higher levels of interregional redistribution in the past show a subsequent increase in interregional disparity, while countries with lower levels of grants and transfers show less divergence or even convergence. The panel reveals a similar picture: countries who have increased their sub-governmental transfers and grants have experienced more divergence (less convergence) over time than countries who have lowered their transfers.
Keywords: Interregional transfers; Redistribution; Evidence; Regional disparity
JEL Codes: H71; H73; R58
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Equalization payments (H29) | Migration decisions (F22) |
| Without federal equalization payments (H79) | Migration from poorer regions to richer regions (R23) |
| Intergovernmental transfers (H77) | Regional disparities (R12) |
| Higher levels of interregional transfers (H77) | Greater subsequent increases in regional disparities (R11) |
| Lower levels of interregional transfers (H79) | Less divergence or convergence (F62) |
| Increased subgovernmental transfers (H77) | More divergence over time (J19) |