Fiscal Competition, Revenue Sharing, and Policy-induced Agglomeration

According to the authors, revenue sharing can be used to discourage low tax regions from competing for capital and firms with high tax regions. However, with heterogeneous regions, revenue sharing involves net transfers across regions and creates a “moral-hazard” problem - that is, regions may want to invest less in market fostering public good when the benefits are shared across nations. This paper analyzes these costs and benefits of revenue sharing.