Fiscal Equalization, Tiebout Competition, and Incentives for Efficiency in a Federalist Country

Abstract

The purpose of this article is twofold. First, it measures the efficiency in the provision of public goods by local jurisdictions applying data envelopment analysis (DEA). Second, it relates efficiency scores to a fiscal equalization scheme designed to mitigate the negative consequences of Tiebout competition. The data come from the twenty-six cantons of Switzerland (2000–2004), a country characterized by marked federalism. Results show the equalization scheme to indeed have a negative influence on performance, resulting in an efficiency–equity trade-off. However, substitution of earmarked payments by lump-sum payments as part of the 2008 reform is likely to enhance cantonal performance.