Optimal Interregional Redistribution and Local Borrowing Rules under Migration and Asymmetric Information
Abstract
Assuming two types of regions that differ only in the discount rate, Huber and Runkel (2008) show that optimal federal redistribution is from impatient to patient regions, and optimal local public debt is higher in impatient regions than in patient regions. In addition, the optimal redistribution scheme in the presence of asymmetric information can be implemented by imposing (more stringent) borrowing constraints on the recipient regions of federal redistribution, justifying differentiated budget institutions in federations. This paper by PERC Research Scientist Liqun Liu, Darong Dai and Guoqiang Tian extends their analysis by allowing for interregional migrations and by considering two alternative regional goals. When the regional governments maximize their respective residents’ welfare, considering the interregional migrations does not change Huber and Runkel’s analysis. When the regional governments maximize their respective natives’ welfare, incorporating migrations would reverse Huber and Runkel’s conclusions when migration intensity is sufficiently high and the regional difference is sufficiently large.
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Citation
Liu, Liqun; Dai, Darong; Tian, Guoqiang (2019). Optimal Interregional Redistribution and Local Borrowing Rules under Migration and Asymmetric Information. Private Enterprise Research Center, Texas A&M University; Texas A&M University. Library. Available electronically from https : / /hdl .handle .net /1969 .1 /199403.