On regional integration, fiscal income, and GDP per capita

This paper investigates the economic impacts of regional integration on a small, less developed jurisdiction in a dynamic fiscal competition environment. The trade-offs between the economic benefits and the loss of policy flexibility resulting from integration are analyzed from the perspectives of fiscal revenue and GDP per capita. Our results show that the small jurisdiction's loss of flexibility in policymaking can dominate the other effects of integration. Specifically, if the small jurisdiction's efficiency in providing public inputs is originally sufficiently high (low), regional integration always reduces (improves) its net revenue, independently of the extent of efficiency improvement due to integration. However, when the small jurisdiction's efficiency is originally intermediate, the impact on net revenue crucially depends on the magnitude of the efficiency effect. Our analysis also characterizes the trade-offs resulting from integration between policy flexibility on the one hand and capital mobility and fiscal equalization on the other.