Three essays on policy function assignment in a federation

• Main Author: Delage, Benoit
• Format: Others
• Language: English
• Published: 2009
• Subjects: Intergovernmental fiscal relations; Industrial policy
• Online Access: http://hdl.handle.net/2429/6763

The first essay explores the nature of the equilibria obtained when state governments conduct industrial policies to affect firms' location choices. The model differs from existing ones by considering industrial policy targeted at small firms. In a simple two-region, two-industry model with imperfection information, it is shown how regions attempt to attract firms from the neighbouring one, either by making cash or in-kind transfers. The model rationalizes the use of in-kind subsidies for incentive-compatibility reasons, even though they are valued less by firms than what they cost to provide. It allows to understand why regions with a smaller industrial base may pursue a more aggressive industrial policy. The model sheds some light on which industries are likely to be targeted by industrial policy, and how the means of income transfers could be selected. The objective of the second paper is to determine under which circumstances an industrial policy that seeks to increase the number of new technologically-based firms in the economy is best assigned to the central or regional governments in a federation. Even though a decentralized industrial policy may be more flexible, it has the drawback that regions compete against each other to acquire successful firms. Because this margin is closed to a central government, it is likely to achieve a better outcome even if operating under "uniformity" constraints. The public policy implication is that this type of industrial policy should be transferred to the federal government. The third essay presents a new rationale for intergovernmental grants in a federation that arises strictly from the income redistribution concerns of the federal government. The central government seeks to redistribute income across agents, and behaves as a Stackelberg leader with respect to regional governments. Intergovernmental grants are needed to effect income redistribution while maintaining appropriate expenditure levels. Differentiated grants allow in some circumstances to implement a "third-best" solution when nominal prices differ across regions. They allow the federal government to affect provincial tax rate and public good provision, thus complementing the income redistribution done directly through the federal income tax system. === Arts, Faculty of === Vancouver School of Economics === Graduate