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This chapter analyzes the political viability of fiscal equalization using a model of conflict directly inspired by Esteban and Ray (1999, 2001). It analyzes the circumstances under which one region would be inclined to initiate political conflict when by doing so it would obtain a higher share of resources than under full equalization, and shows how political conflict affects fiscal redistribution across regions and thus sometimes violates the Pigou–Dalton principle.

This chapter uses the marginal cost of public funds (MCF) to analyze three policy issues that arise in a federation. The chapter is organized as follows. Section 10.1 uses the MCF concept to analyze the provision of investment incentives by subnational governments. In particular, this framework is used to evaluate the provision of R&D tax subsidies by provincial governments in Canada. Section 10.2 shows how fiscal equalization grants may have affected the perceived MCFs of the state governments in Australia. Section 10.3 applies a modified version of the Kanbur and Keen (1993) crossborder shopping model to the effects of an equalization grant system on the horizontal and vertical fiscal imbalances in a federation. It explores how the financing of equalization grants—either funding by the federal government out of general tax revenues or direct contributions by the state governments—affects the ability of equalization grants to address vertical and horizontal fiscal imbalances.

This chapter examines the system and nature of federal fiscal transfers in India within the broad parameters of intergovernmental fiscal relations. It shows that the transfer system, as evolved over the years, has been able to reduce expenditure inequality across states only at the margin largely due to the fragmented transfer system and growing regional inequalities. The chapter also observes that though at levels the transfer system appears progressive, it shows regressive sign when one relates with the state-level per capita income over time.

Chapter 4 presents the results of the empirical research. The nine case studies, which include federal and regionalized states confronted by either performance or integration problems, are presented in short reports. The studies cover the particular historical situation of the reform process under consideration, the setting of the agenda and its evolution during the reform process, the constitutional negotiations, the ratification process and the outcome of constitutional policy. Thus, success stories are identified and distinguished from stories of failure occurring in states where a balance of power could not be achieved or where the constitution became more rigid. The study reveals that formal constitutional amendments do not always restore the balance of a multilevel government. Moreover, a rejection of a constitutional amendment bill in ratification does not necessarily indicate failure of constitutional policy.