Federal Fiscal Constitutions ; Part I: Risk Sharing and Moral Hazard
AbstractInspired by the current European developments, we study equilibrium fiscal policy under alternative "federal" arrangements. Our model has two levels of government. Local policy redistributes across individuals and affects the probability of aggregate shocks, whereas federal policy shares international risk. Policies are chosen under majority rule. There is a tradeoff between risk-sharing and moral hazard: federal risk-sharing can induce local governments to enact policies that increase local risk. We analyze this tradeoff under alternative fiscal constitutions. In particular, we contrast a vertically ordered system like the EC with a horizontally ordered federal system like the US. These alternative arrangements create different incentives for policymakers and voters, and give rise to different political equilibria. Under appropriate institutions, centralization of functions and power can mitigate the moral hazard problem.
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Bibliographic InfoPaper provided by Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC) in its series UFAE and IAE Working Papers with number 222.93.
Length: 37 pages
Date of creation: 1993
Date of revision:
tax policy ; risk;
Other versions of this item:
- Persson, T. & Tabellini, G., 1992. "Federal Fiscal Constitutions ; Part I: Risk Sharing and Moral Hazard," Papers 519, Stockholm - International Economic Studies.
- Torsten Persson & Guido Tabellini, . "Federal Fiscal Constitutions. Part I: Risk Sharing and Moral Hazard," EPRU Working Paper Series 93-04, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics.
- Persson, Torsten & Tabellini, Guido, 1992. "Federal Fiscal Constitutions. Part I: Risk Sharing and Moral Hazard," CEPR Discussion Papers 728, C.E.P.R. Discussion Papers.
- Torsten Persson & Guido Tabellini, 1992. "Federal fiscal constitutions part 1: risk sharing and moral hazard," Discussion Paper / Institute for Empirical Macroeconomics 72, Federal Reserve Bank of Minneapolis.
- D70 - Microeconomics - - Analysis of Collective Decision-Making - - - General
- E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
- H10 - Public Economics - - Structure and Scope of Government - - - General
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