Is a Uniform Social Policy Better? Fiscal Federalism and Factor Mobility

This paper develops a two-country model to study two questions. How do the degrees of centralization of redistribution and of factor mobility affect the productive efficiency of the economies? What degrees of centralization of redistribution and of factor mobility are likely to be chosen by majority rule? The model shows that a system of centralized redistribution can lead to less efficient outcomes if labor or capital are not mobile; and an inefficient outcome, with incomplete or no factor mobility, receives a majority of votes in both countries, whenever the structure of labor markets is very different in the two countries.