The fiscal externality model is extended to an infinite horizon setting with stochastic technologies. With imperfect population mobility some gains from risk sharing are not exploited by the regional authorities. Nevertheless, regional authorities who care about their reputation may be able to commit to an efficient allocation. For this to happen the present value of the gains from coordination to each region should be larger than the instantaneous costs to the region of making the transfers necessary for risk sharing. It is not possible to say a priori whether improvements in the degree of mobility will make this more likely.
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Paper provided by York University, Department of Economics in its series Working Papers with number
1996_04.
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