Risk Sharing and Moral Hazard with a Stability Pact

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Risk Sharing and Moral Hazard with a Stability Pact

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Roel Beetsma
Henrik Jensen

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Abstract

We show how a stability pact based on deficit sanctions eliminates the exacerbation of debt accumulation that may arise from monetary unification. Moreover, by making sanctions contingent upon the economic situation of countries, the stability pact provides for risk sharing. Differences in initial debt levels, however, reduce the scope for unanimous support for a pact. We introduce also endogenous „fiscal discipline“ whose unobservability leads to moral hazard in its provision. If countries are ex ante identical, it is nevertheless optimal to make sanctions at least to some extent contingent on countries’ economic situation. However, with cross-country differences in the costs of providing discipline, some countries may oppose such contingency.

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Paper provided by Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics in its series EPRU Working Paper Series with number 99-11.

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Handle: RePEc:kud:epruwp:99-11

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Paper
- Beetsma, Roel & Jensen, Henrik, 1999. "Risk Sharing and Moral Hazard with a Stability Pact," CEPR Discussion Papers 2167, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)

This paper has been announced in the following NEP Reports:

NEP-ALL-2003-05-08 (All new papers)
NEP-MIC-2003-05-13 (Microeconomics)
NEP-RMG-2003-05-08 (Risk Management)

Cited by:
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Wolfgang Eggert & Martin Kolmar, . "Contests with Size Effects," EPRU Working Paper Series 02-04, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics. [Downloadable!]
Other versions:
- Wolfgang Eggert & Martin Kolmar, 2005. "Contests with Size Effects," Ifo Working Paper Series Ifo Working Paper No. 2, Ifo Institute for Economic Research at the University of Munich. [Downloadable!]
- Wolfgang Eggert & Martin Kolmar, 2004. "Contests with Size Effects," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
- Eggert, Wolfgang & Kolmar, Martin, 2006. "Contests with size effects," European Journal of Political Economy, Elsevier, vol. 22(4), pages 989-1008, December. [Downloadable!] (restricted)
Wolfgang Eggert & Laszlo Goerke, . "Fiscal Policy, Economic Integration and Unemployment," EPRU Working Paper Series 02-05, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics. [Downloadable!]
Other versions:
- Eggert, Wolfgang & Goerke, Laszlo, 2003. "Fiscal Policy, Economic Integration and Unemployment," IZA Discussion Papers 937, Institute for the Study of Labor (IZA). [Downloadable!]
- Wolfgang Eggert & Laszlo Goerke, 2003. "Fiscal Policy, Economic Integration and Unemployment," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
Kari Alho, 2002. "The Stability Pack and Inefficiencies in Fiscal Policy Making in EMU," Discussion Papers 715, The Research Institute of the Finnish Economy. [Downloadable!]
Wolfgang Eggert & Martin Kolmar, . "Information Sharing, Multiple Nash Equilibria, and Asymmetric Capital-Tax Competition," EPRU Working Paper Series 02-01, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics. [Downloadable!]

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