Interregional Redistribution and Regional Disparities: How Equalization Does (Not) Work

32 Pages Posted: 6 Dec 2010

See all articles by Anke S. Kessler

Anke S. Kessler

Simon Fraser University (SFU) - Department of Economics; University of Bonn - Economic Science Area; Centre for Economic Policy Research (CEPR)

Christian Lessmann

Technology University of Braunschweig; Ifo Branch Dresden; CESifo (Center for Economic Studies and Ifo Institute) - Ifo Institute

Date Written: December 2010

Abstract

Do inter-governmental transfers such as equalization grants reduce interregional disparities? This paper studies both theoretically and empirically the impact of interregional redistribution on interregional inequality. We set up a model with residential choice and equalization grants between regions, and show that interregional transfer payments prevent convergence promoting migration. We test our model in using cross-country data and panel data for 22 highly developed OECD countries. The evidence suggests a positive relationship between interregional transfers and regional disparities both across countries and over time from 1982 to 2000. In the cross-section data, we find that countries with higher levels of interregional redistribution in the past show a subsequent increase in interregional disparity, while countries with lower levels of grants and transfers show less divergence or even convergence. The panel reveals a similar picture: countries who have increased their sub-governmental transfers and grants have experienced more divergence (less convergence) over time than countries who have lowered their transfers.

Keywords: Interregional Transfers, Redistribution Evidence, Regional Disparity

JEL Classification: H71, H73, R58

Suggested Citation

Kessler, Anke S. and Lessmann, Christian, Interregional Redistribution and Regional Disparities: How Equalization Does (Not) Work (December 2010). CEPR Discussion Paper No. DP8133, Available at SSRN: https://ssrn.com/abstract=1718928

Anke S. Kessler (Contact Author)

Simon Fraser University (SFU) - Department of Economics ( email )

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University of Bonn - Economic Science Area ( email )

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HOME PAGE: http://www.wipol.uni-bonn.de/~kessler/

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Christian Lessmann

Technology University of Braunschweig ( email )

Abt-Jerusalem-Str. 7
Braunschweig, D-38106
Germany

Ifo Branch Dresden ( email )

Poschinger Str. 5
Munich, 01069
Germany

CESifo (Center for Economic Studies and Ifo Institute) - Ifo Institute ( email )

Poschinger Str. 5
Munich, 01069
Germany

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