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International audience ; Our paper presents a model of decentralized leadership with fiscal equalization and imperfect economic integration. The degree of trade integration (reflected by trade costs) turns out to have an effect on both the state tax rates and the ex-post vertical equalization transfers. Our main results are the following: Ex post vertical transfers are welfare deteriorating for low levels of trade integration while they are welfare improving compared to tax competition when trade integration is high enough. However, when public goods are highly valued by the citizens of the federation, ex post transfers are always welfare enhancing.

AbstractThis paper aims to determine how the composition of public expenditure affects countries' economic growth depending on their level of development. We show that there is a strong association between a country's level of development and the amount of public spending. Productive spending dominates in poorer countries while richer countries have a higher proportion of unproductive spending. Furthermore, productive spending has a greater effect on growth in poorer countries. We illustrate our findings using dynamic panel GMM estimators with data from 147 countries (31 low, 69 medium and 47 high‐income countries) covering the period 1970–2008. We also find that education expenditures are the more productive public spending.