Entry in Tax Competition and Intergovernmental Transfer

This paper proposes an efficient intergovernmental transfer system within fiscal competition settings under the endogenization of the number of regions that engage in fiscal competition. In our theoretical model, two externalities arise, namely: (1) fiscal externalities; and (2) externalities resulting from the endogenization of the number of regions. If a system is a full equalization system, inefficiencies in the public input supply and the number of competing regions are resolvable. This is because the two externalities can be internalized.