Dynamic Horizontal and Vertical Equity in Intergovernmental Transfers

This paper shows that actual systems of intergovernmental transfers are incompletely specified when viewed as mechanisms that operate over time, and that the norms of evolution most frequently used do not preserve the distributive properties they have at their initial position. We argue that this problem is solved if these systems are completed with a dynamic condition of vertical equity based on the same economic premises that underlie their static specification. This gives rise to a new norm of evolution that over time preserves both Horizontal Equity and Vertical Equity: the HEAVE norm.