Recent literature has emphasized that redistributive grant systems may tend to internalize fiscal externalities arising from tax competition. This paper further explores the conditions under which local grant systems enforced by the state government will enhance efficiency. A system of...

This paper exploits a recent devolution of tax setting powers in the German federation to study the effects of fiscal equalization on subnational governments’ tax policy. Based on an analysis of the system of fiscal equalization transfers, we argue that the redistribution of revenues provides...