Impure public goods, matching grant rates and income redistribution in a federation with decentralized leadership and imperfect labor mobility

We examine the decentralized provision of an impure public good by regional governments in a federation similar in certain respects to both the European Union and the United States. The central authority redistributes income and provides matching grants on a per rate basis after it observes the regions’ contributions to the impure public good. Imperfectly mobile workers react to regional and central governments’ policies by establishing residence in their most preferred region. We show that the allocations of the impure public good and the population are generally efficient in a federation with decentralized leadership.