Vertical externalities with lump-sum taxes: how much difference does unemployment make?

Diego Martinez-Lopez, Tomas Sjongren


This paper analyses how the existence of unemployment affects the conventional approach to vertical externalities. We discuss the optimality rule for the provision of public inputs both in a unitary and in a federal state. Our findings indicate that decentralising spending responsability on public inputs in the presence of unemployment allows output to be closer to the first best level. Moreover, we describe the inability of the federal government, behaving as a Stackelberg leader, to replicate the unitary outcome, unless there are new policy instruments at government's disposal.


Public inputs; unemployment; vertical externalities

Full Text:



Boadway, Robin and Jean-François Tremblay (2006) ‘A theory of fiscal imbalance’, FinanzArchiv/Public Finance Analysis 62 (1): 1-27.

Dahlby, Bev and Leonard S. Wilson (2003) ‘Vertical fiscal externalities in a federation’, Journal of Public Economics 87(5/6): 917-930.

Keen, Michael (1998) ‘Vertical tax externalities in the theory of fiscal federalism’, IMF Staff Papers 45 (3): 454-485.

Kotsogiannis, Christos and Diego Martinez (2008) ‘Ad valorem taxes and the fiscal gap in federations’, Economics Letters 99 (3): 431-434.

Martinez, Diego (2008) ‘Optimal federal taxes with public inputs’, FinanzArchiv /Public Finance Analysis 64(4): 422-433.

Martinez, Diego and A. Jesús Sanchez (2010) ‘A note on the optimal level of public inputs’, Social Choice and Welfare 34(3): 363-369.

Martinez, Diego and Tomas Sjongren (2013) ‘Can labor market imperfections cause overprovision of public inputs?’, Journal of Economic Research, 18 (2): 135 - 146.

Ogawa, Hikaru, Yasuhiro Sato and Toshiki Tamai (2006) ‘A note on unemployment and capital tax competition’, Journal of Urban Economics 60(2): 350-356.

Sato, Motohiro (2000) ‘Fiscal externalities and efficient transfers in a federation’, International Tax and Public Finance, 7:119-139.


  • There are currently no refbacks.

Creative Commons License
This work is licensed under a Creative Commons Attribution 4.0 International License.

RepecSparc EuropeCOREEconBib