A Positive Theory of Interregional Redistribution and Constitutional Choice

The paper studies the effects and the determinants of interregional redistribution in a federation of jurisdictions among which households are mobile. Each jurisdiction controls a local redistributive policy that is democratically chosen by its residents. Paradoxical consequences of interjurisdictional transfers arise. If regions are self sufficient, they necessarily converge with respect to policies and average incomes. Horizontal transfers between jurisdictions, in contrast, lead to the divergence of regional policies and per capita incomes. Because interregional transfer schemes prevent interregional equality, however, they also allow for more interpersonal equality among the inhabitants of each region. For this reason, the voting population may in a decision over the fiscal constitution deliberately implement such a transfer scheme to foster regional divergence.