Policy equilibria in a federal system: the effects of higher tax ceilings for unemployment insurance

In many federal systems a higher authority imposes changes that may alter l ower-level policies, depending on the type of change and differences among lower-level parties. For example, we model changes in the parameters of Ame rican states' unemployment insurance (UI) systems when the federal governme nt raises the UI tax ceiling. Bargaining among interested parties alters UI benefits and taxes. We estimate a 'difference-in-differences' model descri bing UI tax payments when federal increases in 1972, 1978 and 1983 increase d some states' ceilings. Where the federal constraint was binding taxes ros e nearly 20 percent. The theory and empirical analysis suggest themselves a s examples for future research on topics in public finance, labor economics and international trade. (C) 1999 Elsevier Science S.A. All rights reserve d.