Laboratory federalism with public funds sharing

Ana Begona Ania Martinez, Andreas Wagener

The theory of laboratory federalism hypothesizes that, in a decentralized multi-jurisdictional system, policies follow an evolutionary learning process with innovation and imitation. This paper studies the role of public funds sharing in such a setting. As a guiding framework we consider a model of decentralized, rich-to-poor redistribution with labor mobility. Uncorrected learning dynamics here lead to a drastic erosion of the welfare state. Suitably designed public funds sharing can correct this failure and may even restore efficiency. Surprisingly, the necessary properties of the sharing scheme for efficiency in the learning model are the same as those that make decentralized Nash play efficient (and vice versa). Public funds sharing, thus, is a powerful corrective device in fiscally decentralized settings for avariety of behavioral modes of government interaction.

Department of Economics
External organisation(s)
Gottfried Wilhelm Leibniz Universität Hannover
No. of pages
Publication date
Austrian Fields of Science 2012
502047 Economic theory
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