Abstract:

This paper uses the panel data method and data from 1982 to 2006 to examine the effect of federal equalization transfers on provincial income disparities in Canadian. Estimation problems of weak instruments and endogenous regressors are addressed by the use of a system generalized method of moment estimator. The results from the empirical analysis indicate that the current rate of convergence of personal income in Canada is 4.48 percent per year. This rate is considerably higher than the range of 1.80 and 2.41 percent per year that previous studies using least square estimators have reported. The findings from the policy analysis show that the fiscal transfers, which are part of the federal equalization program, have reduced provincial income disparities by accelerating the speed of convergence for Canadian provinces.