This paper introduces fiscal increasing returns, through endogenous labor income tax rates as in Schmitt-Grohe and Uribe (1997), into the overlapping generations model with endogenous labor, consumption in both periods of life and homothetic preferences (e.g., Lloyd-Braga, Nourry and Venditti,...

This paper analyzes the welfare implications of a transfer mechanism in a fiscally decentralized economy where local governments select their tax collection effort to maximize their lifetime utility. We consider a transfer rule that both punishes for the lack of efficiency in tax-collection and...