Author: Çevik, Zeynep Burcu Title: Welfare Effects of Intergovernmental Transfers: Equity vs. Efficiency Supervisor: Assist. Prof. Dr. Ömer Kağan Parmaksız Department: Economics Date: May 2016 Abstract: Intergovernmental transfers, that are significant source of income for state and local governments, are needed to annihilate the fiscal imbalances. This dissertation aims to investigate the welfare effects of an intergovernmental transfer rules in fiscally decentralized economies. The particular linear redistribution rule used in this study takes into account two criteria: equity and efficiency. The model consists of citizens, symmetric local governments and a central government, which are in a strategic interaction. Our study is the first to include interactions between these agents under a redistribution rule. So, this study focuses on Markov-perfect Nash equilibrium of this economy by a continuum of households and governments that act sequentially. There exist public good spillovers across regions and tax competition between local governments through mobile capital. Welfare is compared among no-rule case and full–rule (equity and efficiency) case and also among no-equity case and no-efficiency case. The results indicate that the welfare in full rule case is always higher than the one in no rule case. Furthermore, for high levels of capital mobility, no efficiency case has higher welfare level than no equity case. This implies that in case of high mobility government should give more weight to equity case. 4