Economics & Finance / Macroeconomics / Fiscal Policy & Government Spending

Why Germany's Fiscal Equalization System Backfires: The Hidden Incentives Destroying Efficiency

Anreizwirkungen von Finanzausgleichssystemen

Tanja Kirn

In this video, we dive into Tanja Kirn's groundbreaking book *Anreizwirkungen von Finanzausgleichssystemen* (Incentive Effects of Fiscal Equalization Systems) to uncover why traditional fiscal transfers between rich and poor regions often fail. Kirn, a German economist, reveals a shocking truth: when governments assume politicians are benevolent, they ignore the self-interest and hidden information that leads to moral hazard and lazy tax collection. Using real-world examples from Germany and Canada, she shows how standard equalization systems actually reward inefficiency, creating a cycle of dependency and waste. But there's hope—Kirn proposes a revolutionary solution using DEA efficiency benchmarks and election-based auctions that force politicians to compete, slashing information rents and delivering better public services at lower costs. Perfect for students of economics, policy wonks, or anyone curious about why your tax money doesn't go as far as it should. Watch to understand the hidden game behind fiscal federalism and how to fix it.