Migration with fiscal externalities

This paper analyses the distribution of a country's population among regions when migration involves fiscal externalities. The main question addressed is whether a decentralized decision making of regional governments can produce an optimal population distribution, as recently asserted, or a centralized intervention is indispensable, as argued before in the literature. In analysing this issue it is assumed that migration is costly and, accordingly, the problem is modelled in a dynamic setup. It turns out that, while with costless mobility the fiscal externality is fully internalized by voluntary interregional transfers, with costly mobility, centrally coordinated transfers still remain indispensable for achieving the socially optimal allocation.