The Impact of Cooperative Arrangements on the Performance of the Local Public Sector

Literature has long learned about the welfare improving effect of equalization in tax competition environments. By setting incentives to local authorities, public spending becomes efficient in spite of relying on a mobile resource as the tax base. This works deals with the impact of local cooperation on equalization. It proves that the first efficiency result cannot hold when local players have influence on the shape of the transfer system. A bargaining concerning equalization may change the incentives arising from equalization.