Income Redistribution with Well-Informed Local Governments

This paper examines the problem of redistributing income across jurisdictions and to mobile workers within jurisdictions when local governments have better information than the central government about local production conditions. Under the central government's optimal policy, the subsidies or taxes that local governments provide to mobile workers normally depend on whether these governments are net recipients or net donors of interjurisdictional income transfers. Moreover, the public-input decisions of some local governments are distorted. The analysis demonstrates that it may not be desirable to harmonize social policies across jurisdictions, even when the beneficiaries are quite mobile.