Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/108560
Authors: 
Neyapti, Bilin
Bulut-Cevik, Zeynep Burcu
Year of Publication: 
2011
Series/Report no.: 
Koç University-TÜSİAD Economic Research Forum Working Paper Series 1114
Abstract: 
This paper analyzes the welfare implications of a transfer mechanism in a fiscally decentralized economy where local governments select their tax collection effort to maximize their lifetime utility. We consider a transfer rule that both punishes for the lack of efficiency in tax-collection and compensates for the deviation of pre-tax or transfer income from a target level; in addition, a portion of transfers is considered to be directed towards investment. Simulations of the model's optimal solution reveal that increasing punishment always results in increased steady state effort, despite the disincentives that increasing income compensation or directed investment may generate. Increasing punishment also improves capital accumulation the lower the rate of directed investments and the lower the tax rate. Further, efficiency in tax collection is achieved the lower the rate of directed investment and the higher the punishment rate.
Subjects: 
Fiscal decentralization
redistribution
JEL: 
E62
H71
O23
Document Type: 
Working Paper

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