Scandinavian Working Papers in Economics

SSE/EFI Working Paper Series in Economics and Finance,
Stockholm School of Economics

No 523: Interregional Inequality and Robin Hood Politics

Malin Bergman ()
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Malin Bergman: Dept. of Economics, Stockholm School of Economics, Postal: Stockholm School of Economics, P.O. Box 6501, SE-113 83 Stockholm, Sweden

Abstract: This paper studies the implications of interregional redistributive taxation on interregional and interpersonal inequality and on social welfare. We introduce a model of two regions, where individuals are differentiated by their ability and opportunity, the former being determined by heritage and the latter by their residence. Moreover, agents are immobile and respond to interregional transfers by adjusting their labour supply, rather than by re-locating. The analysis shows, firstly, that increases in the rate of interregional redistribution need not generate neither reduced interregional inequality nor higher social welfare, and secondly, that their effects are highly dependent on the initial state of the economy. In particular, interregional redistribution seems most likely to be beneficial in terms of interregional and interpersonal equity as well as social welfare in low-tax economies, where the degree of income dispersion is high between, but not within regions.

Keywords: interregional redistribution; welfare; inequality

JEL-codes: H31; H73

24 pages, March 14, 2003

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