Efficiency of Local Policy Programmes under Free Migration

Abstract

A Neo-Keynesian macroeconomic model is constructed to examine the efficiency of a local tax-transfer programme under free migration. An application of the Adaptive Expectations Hypothesis is used todescribe people’s perceptions of the programme. It is shown that fair programmes with no effects on localwelfare have no effect on migration either thus being efficient in the long term. In the short term, falseperceptions concerning the repayments make the programme unfair. Migration enforces the excess burden ofan unfair programme, but gradual correction of the perceptions eventually mitigates the effects to zero.