Should transfer payments be indexed to local price levels?

When individuals are mobile, utility levels will be equalized across space, and equity is not improved by indexing transfers to local prices. Indexing is also inefficient, since transfers to high cost areas buy less. The true rationale for indexing is that optimal transfer policy should equalize the marginal utilities of income, not the total utility levels. The marginal utility of income may be higher in high price areas, especially when local amenities and income are complements. The current level of implicit indexing appears too strong to be optimal, despite the absence of any specific indexing rules (C) 1998 Elsevier Science B.V.