Contractual fiscal equivalence versus geographical fiscal equivalence

This work extends the contractual procedure, normally used in the relationships among persons, to intergovernmental relationships namely those among local jurisdictions. This changing in perspective challenges the efficiency criterion based on geographical fiscal equivalence; in fact the level of equilibrium does not depend on the level of the public good provided per se; it rather depends on the fiscal system, on the position of the median voter, on whether interjurisdictional mobility is either favoured or forbidden, and finally on whether the central government uses transfers either for redistributive purposes or as payments of the services provided by local jurisdictions. In particular, the paper shows that if two jurisdictions of the same level are allowed to have contractual relationships (horizontal relationships) the more efficient of the two can sell the service also to the less efficient, so reducing citizens' unit costs.