ZEW Discussion Papers
Regional Stabilization by Fiscal Equalization? Theoretical Considerations and Empirical Evidence from Germany
Büttner, Thiess (1999), Regional Stabilization by Fiscal Equalization? Theoretical Considerations and Empirical Evidence from Germany, ZEW Discussion Paper No. 99-23, Mannheim. Download
In the context of EMU fiscal equalization schemes have been proposed as a means to stabilize regions against asymmetric shocks. A theoretical analysis shows that besides reducing the cross-sectional income variance the redistributive
element of fiscal equalization causes incentive effects for regional governments, undermining the efficient supply of public goods. Yet, this objection is shown to be less important in a situation of insufficient demand,
where interregional redistribution actually favors stabilization. In an empirical analysis for Germany, the paper adds support for the finding of significant
regional stabilization by fiscal flows. The results indicate that about 17 % of GDP variation across West Germany's states has been removed by fiscal flow s during the last two decades. Thus, in Germany where the fiscal federalism
is critizised for its heavy equalization the extent of regional stabilization provided by fiscal flows is quite similar to other federal countries.