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Fenge, Robert
von Weizsäcker, Jakob
Year of Publication: 
Series/Report no.: 
CESifo Working Paper No. 366
We treat fiscal equalisation as an insurance device against regional tax revenue variance. This insurance comes at the price of a moral hazard: regional government will spend too little effort on the development of the local tax base. In a simple bargaining model with two identical regions we show that less than total fiscal equalisation combined with lump sum transfers will be optimal. Taking a step back to the constitutional bargaining behind some veil of ignorance which determines the fallback position for later negotiations, we show that writing total fiscal equalisation into the constitution will be optimal.
Fiscal equalisation
constitutional bargaining
moral hazard
Document Type: 
Working Paper

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