This paper analyzes the effect of intergovernmental transfers on fiscal
equalization. Transfer policies are expected to narrow the fiscal power gaps
among local governments in different economic conditions. However, the
policies may reduce inequality by rearranging rankings as well. According to
Lerman and Yizhaki(1995) tradition, we decompose changes in the Gini
coefficient by various Korean transfer policies across governments in 2006 into
gap-narrowing and reranking components. The paper finds that although both
equalization and categorical grants from the central government to local
governments decrease the Gini coefficients, the reranking effects are so
dominating that the gap-narrowing effects become negative at the margin. It
implies that the current intergovernmental transfers result in over-equalization
of fiscal power gaps.