Incentives in the German Fiscal Federalism System

For decades, fiscal federalism in Germany – and, in particular, the financial equalisation system – have been subject to both academic research and public debate. Financial equalisation systems generally exist alongside a conflict of objectives between balancing financial resources across jurisdictions and creating incentives that are as high as possible to strengthen a jurisdiction's own capacities. With its extensive redistribution measures, German fiscal federalism can be regarded as essentially capable of creating equivalent living conditions. However, as it significantly differs from the theoretical model of federalism, allocative efficiency is frequently questioned by economists. By carrying out a multi-dimensional incentive analysis, this research expands the primarily one-dimensional discussion on the link between incentives and the actions of political decision-makers at the sub-central level. Through its innovative approach, this research work sheds new light on a major research topic of public finance in the German context and allows for the identification of determinants that have an impact on measures enhancing both economic and fiscal strength.