The marginal cost of public funds (MCF) measures the loss incurred by society in raising additional revenues to finance government spending. The MCF has emerged as one of the most important concepts in public economics; it is a key component in evaluations of tax reforms, public expenditure...

Should provincial business taxes be deductible under a federal profit tax? We show that the "optimal deductible," which neutralizes the vertical fiscal externality between the federal and provincial government, is the change in the federal tax base per dollar of tax revenue collected by the...

An optimal tax system equates the marginal cost of public funds across all tax bases. This idea is applied to a federation to derive the optimal unconditional transfers that will promote an optimal allocation of taxation and expenditures among the governments in the federation. This approach...

A lump-sum intergovernmental transfer has a "price effect", as well as an "income effect", because it allows the recipient government to reduce its tax rate, which lowers its marginal cost of public funds, while still providing the same level of public service. This reduction in the effective...

A median voter model is developed to explain the size of the vertical fiscal gap in a federation, i.e. the extent to which subnational governments' expenditures exceed their own-source tax revenues. In our model, individuals vote in subnational elections and in federal elections to determine tax...

We generalize the Boadway and Keen (2006) model of adverse selection in a capital market to allow for risk aversion on the part of entrepreneurs. We show that the Boadway and Keen conclusion-that adverse selection leads to excessive investment-does not necessarily hold when entrepreneurs are...

Does democracy lead to the creation of too many municipalities? We analyze this issue within the context of the Alesina and Spolare (1996) model where the quality of municipal services deteriorates with the distance from the center of a municipality. Individuals can vote in a referendum to split...