Federalism, Grants, and Fiscal Equalization

Abstract

Buchanan's model of fiscal equalization, widely discussed in Canadian literature and aimed at horizontal equity across the member jurisdictions of a federation, is reexamined. The first section traces its development. The second section raises some critical issues and examines the rationale of capacity equalization as an alternative approach. The third section examines Buchanan's conjecture that aggregate transfers under the two approaches tend to be similar. Their determinants are explored and the similarity hypothesis is sustained for simplifying assumptions. The fourth section further tests its validity for truncated samples of Canadian provinces and U.S. urban data.