Federal Fiscal Constitutions. Part I: Risk Sharing and Moral Hazard
AbstractInspired by current European developments, we study equilibrium fiscal policy under alternative constitutional arrangements in a `federation' of countries. There are two levels of government: local and federal. Local policy redistributes across individuals and affects the probability of aggregate shocks, while federal policy shares international risk. Policies are chosen under majority rule. There is a moral-hazard problem: federal risk-sharing can induce local governments to enact policies that increase local risk. We investigate this incentive problem under alternative fiscal constitutions. In particular, we contrast a `horizontally-ordered' federal system like the United States (in which the federal government deals directly with individuals) with a `vertically-ordered' system like the EC (in which the federal government deals with national states). These alternative arrangements are not neutral, in the sense that they create different incentives for policy-makers and voters, and give rise to different political equilibria. A general conclusion is that centralization of functions and power can be welfare improving under appropriate institutions. This conclusion only applies, however, to the moral-hazard problem and a federation where the countries are not too dissimilar.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Bibliographic InfoPaper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 728.
Date of creation: Oct 1992
Date of revision:
Contact details of provider:
Postal: Centre for Economic Policy Research, 77 Bastwick Street, London EC1V 3PZ.
Phone: 44 - 20 - 7183 8801
Fax: 44 - 20 - 7183 8820
Other versions of this item:
- 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, T. & Tabellini, G., 1993. "Federal Fiscal Constitutions ; Part I: Risk Sharing and Moral Hazard," UFAE and IAE Working Papers 222.93, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
- 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.
- Persson, T. & Tabellini, G., 1992. "Federal Fiscal Constitutions ; Part I: Risk Sharing and Moral Hazard," Papers 519, Stockholm - International Economic Studies.
- 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
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Guido Tabellini & Alberto Alesina, 1988.
"Voting on the Budget Deficit,"
UCLA Economics Working Papers
539, UCLA Department of Economics.
- Alesina, Alberto F & Tabellini, Guido, 1988. "Voting on the Budget Deficit," CEPR Discussion Papers 269, C.E.P.R. Discussion Papers.
- Alberto Alesina & Guido Tabellini, 1988. "Voting on the Budget Deficit," NBER Working Papers 2759, National Bureau of Economic Research, Inc.
- Tabellini, Guido & Alesina, Alberto, 1990. "Voting on the Budget Deficit," Scholarly Articles 4553030, Harvard University Department of Economics.
- Xavier Sala-i-Martin & Jeffrey Sachs, 1991.
"Fiscal Federalism and Optimum Currency Areas: Evidence for Europe From the United States,"
NBER Working Papers
3855, National Bureau of Economic Research, Inc.
- Sachs, Jeffrey & Sala-i-Martin, Xavier, 1992. "Fiscal Federalism and Optimum Currency Areas: Evidence for Europe from the United States," CEPR Discussion Papers 632, C.E.P.R. Discussion Papers.
- Grandmont, Jean-Michel, 1978. "Intermediate Preferences and the Majority Rule," Econometrica, Econometric Society, vol. 46(2), pages 317-30, March.
- Rogoff, Kenneth, 1985. "The Optimal Degree of Commitment to an Intermediate Monetary Target," The Quarterly Journal of Economics, MIT Press, vol. 100(4), pages 1169-89, November.
- Bureau, Dominique & Champsaur, Paul, 1992. "Fiscal Federalism and European Economic Unification," American Economic Review, American Economic Association, vol. 82(2), pages 88-92, May.
- Jewitt, Ian, 1988. "Justifying the First-Order Approach to Principal-Agent Problems," Econometrica, Econometric Society, vol. 56(5), pages 1177-90, September.
- Wildasin, David E, 1990. "Budgetary Pressures in the EEC: A Fiscal Federalism Perspective," American Economic Review, American Economic Association, vol. 80(2), pages 69-74, May.
- Agnello, Luca & Sousa, Ricardo M., 2009.
"The determinants of public deficit volatility,"
Working Paper Series
1042, European Central Bank.
- Bolton, Patrick & Roland, Gerard & Spolaore, Enrico, 1996. "Economic theories of the break-up and integration of nations," European Economic Review, Elsevier, vol. 40(3-5), pages 697-705, April.
- Lejour, A.M., 1995. "Cooperative and competitive policies in the EU: The European Siamese twin?," Discussion Paper 1995-20, Tilburg University, Center for Economic Research.
- Fausto Hernández Trillo & Alberto Díaz Cayeros & Rafael Gamboa González, 2002. "Fiscal Decentralization in Mexico: The Bailout Problem," Research Department Publications 3143, Inter-American Development Bank, Research Department.
- Caillaud, B. & Jullien, B. & Picard, P., 1996. "National vs European incentive policies: Bargaining, information and coordination," European Economic Review, Elsevier, vol. 40(1), pages 91-111, January.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.