REDISTRIBUTION WITHIN AND ACROSS THE REGIONS OF A FEDERATION

We reconsider the literature on redistribution within a federation with mobile agents. We conclude that redistribution is a function best assigned to the national government; local governments with diverse preferences for redistribution distort individual migration decisions. We also examine the fiscal externality literature, which has made an efficiency argument for interregional transfers. We show that if local governments have the same preferences for redistribution, the Nash equilibrium is efficient. If preferences are diverse, we show that nationally imposed interregional transfers do not address the source of the inefficiency. Nevertheless, interregional transfers are shown to be a part of decentralized behaviour.