Fiscal Policy as a Game among the Union, the States and Municipalities in Brazilian Fiscal Federalism

Abstract

Using game theory tools, the main purpose of this paper is to propose a model of fiscal policy with vertical tax competition which represents the Brazilian case. In a game of fiscal policy between federal government and one representative state three situations are considered: in the first, the decisions of fiscal policy are simultaneous; in the second, the federal government has first move advantage; and in the third it is proposed a situation where the state has the monopoly power to tax. Using the federal government and states tax rates over the 1947 to 2009 an empirical evidence for the proposed model is found.