Federalism, Human Capital Accumulation and Inequality

In this paper we use an overlapping generations model with heterogeneous agents and an education-related public good, in order to analyze the relationship between fiscal federalism, human capital accumulation, and inequality in the distribution of human capital and income among individuals and regions. We show that the more dispersed the distribution of income within a region, the more the region benefits from a decentralized provision of the education-related public good, in terms of higher accumulation of human capital. Nevertheless we show that, with decentralization, there exists a trade-off between accumulation of human capital and equality in the distribution of income among citizens within a region: a region that accumulates more (less) human capital with decentralization, exhibits also higher (lower) interpersonal inequality among its citizens. Results show also that federalism may reduce regional disparities.