Laboratory federalism with public funds sharing

Ana Begona Ania Martinez (Corresponding author), Andreas Wagener

Publications: Contribution to journalArticlePeer Reviewed

Abstract

Laboratory federalism hypothesizes that decentralization fosters innovation and learning in multijurisdictional systems, conducing to good policies. We discuss this using evolutionary stability, focusing in this paper on public funds sharing. In a model of rich-to-poor redistribution with labor mobility, where policy choices based on relative success lead to drastic welfare erosion, suitably designed sharing schemes can restore efficiency. Their necessary properties are the same as in a Nash equilibrium, showing they are a powerful corrective device for different modes of government interaction. Two drawbacks appear: reduced accuracy due to large multiplicity and a tendency to overly reward inefficiently high redistribution.
Original languageEnglish
Pages (from-to)1047-1065
Number of pages19
JournalEconomic Inquiry
Volume59
Issue number3
Early online date24 Feb 2021
DOIs
Publication statusPublished - Jul 2021

Austrian Fields of Science 2012

  • 502010 Public finance
  • 502047 Economic theory
  • 502021 Microeconomics

Keywords

  • evolutionary stability
  • laboratory federalism
  • labor mobility
  • public funds sharing
  • redistribution

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