Equalizing Transfers - Source of (In)Stability in Federations

Equalizing transfers are a central feature of federally-organized countries. Their basic motivation is to enhance the idea of a social citizenship and to promote economic and political stability. However, experience shows that they are also a frequent source of destabilization. The two implications of transfers are related to the degree of redistribution that transfers entail and the incentive effects that they produce at lower-level governments, both being a continuing source of controversy in the political debate. The talk gives an overview of the different effects of transfers and relates the findings to the current debate on equalizing transfers in different countries.