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Interregional redistribution and budget institutions with private information on intergenerational externality

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  • Darong Dai

    (Shanghai University of Finance and Economics)

  • Liqun Liu

    (Texas A&M University)

  • Guoqiang Tian

    (Texas A&M University
    Hubei University of Economics)

Abstract

We study a federal government’s optimal redistributive policy across regions in the context of a model in which regions issue debt, invest in intergenerational public goods (IPGs), and have private information regarding the durability of their IPG investment. First, in both the complete-information and the asymmetric-information optimum, the region with a higher degree of intergenerational spillovers (H-region) should borrow more than the region with a lower degree (L-region). Second, to induce truth-telling under asymmetric information, the region not distorted on intertemporal allocation should be the contributor of redistribution. Third, the asymmetric-information optimum is implementable through decentralized regional debt decisions by imposing differentiated budget institutions: if H-region is distorted on intertemporal allocation, then it faces a debt floor; if L-region is distorted, then it faces a debt ceiling.

Suggested Citation

  • Darong Dai & Liqun Liu & Guoqiang Tian, 2019. "Interregional redistribution and budget institutions with private information on intergenerational externality," Review of Economic Design, Springer;Society for Economic Design, vol. 23(3), pages 127-154, December.
    • Handle: RePEc:spr:reecde:v:23:y:2019:i:3:d:10.1007_s10058-019-00225-z
    DOI: 10.1007/s10058-019-00225-z
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    More about this item

    Keywords

    Interregional redistribution; Regional debt; Borrowing rules; Asymmetric information; Intergenerational public goods;
    All these keywords.

    JEL classification:

    • H41 - Public Economics - - Publicly Provided Goods - - - Public Goods
    • H74 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Borrowing
    • H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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