REDISTRIBUTION AND ADMINISTRATIVE FEDERALISM

In this paper, redistribution is studied in the presence of migration externalities. Administrative federalism is defined as a constitution where statutory tax and transfer levels are set nationally, while loca l administrations may refuse to pay the transfer or rebate the tax in single cases, thereby introducing horizontal inequity. With risk avers ion, this is less attractive than reducing the level of redistribution in a horizontally equal way. It is shown that administrative federali sm leads to higher transfers and higher utilitarian welfare than decen tralized decisions, that it may implement the first-best solution, and that horizontal inequity never occurs in equilibrium.