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Endogenous Policy Leads to Inefficient Risk Sharing

Author

Listed:
  • Marco Celentani

    (Universidad Carlos III)

  • J. Ignacio Conde-Ruiz

    (FEDEA)

  • Klaus Desmet

    (Universidad Carlos III)

Abstract

We analyze risk sharing and endogenous fiscal spending in a two-region model with sequentially complete markets. Fiscal policy is determined by majority voting. When policy setting is decentralized, regions choose fiscal spending in an attempt to manipulate security prices. This leads to incomplete risk sharing, despite the existence of complete markets and the absence of aggregate risk. When a fiscal union centralizes fiscal policy, complete risk sharing ensues. If regions are relatively homogeneous, median income residents of both regions prefer the fiscal union. If they are relatively heterogeneous, the median resident of the rich region prefers the decentralized setting. (Copyright: Elsevier)

Suggested Citation

  • Marco Celentani & J. Ignacio Conde-Ruiz & Klaus Desmet, 2004. "Endogenous Policy Leads to Inefficient Risk Sharing," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 7(3), pages 758-787, July.
    • Handle: RePEc:red:issued:v:7:y:2004:i:3:p:758-787
    DOI: 10.1016/j.red.2003.12.001
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    Citations

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    Cited by:

    1. Andrea Mattozzi, 2010. "Policy Uncertainty, Electoral Securities, And Redistribution," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 51(1), pages 45-71, February.
    2. Morelli, Massimo & Tavares, José & Luque, Jaime, 2011. "Fiscal Union Consensus Design under the Risk of Autarky," CEPR Discussion Papers 8552, C.E.P.R. Discussion Papers.
    3. Luigi Guiso & Helios Herrera & Massimo Morelli & Tommaso Sonno, 2018. "Global Crises and Populism: the Role of Eurozone Institutions," EIEF Working Papers Series 1806, Einaudi Institute for Economics and Finance (EIEF), revised May 2018.
    4. Luque, Jaime & Morelli, Massimo & Tavares, José, 2014. "A volatility-based theory of fiscal union desirability," Journal of Public Economics, Elsevier, vol. 112(C), pages 1-11.
    5. José Tavares, 2012. "Fiscal Union Consensus Design Under The Threat Of Autarky," 2012 Meeting Papers 202, Society for Economic Dynamics.
    6. Andrea Mattozzi, 2008. "Can we insure against political uncertainty? Evidence from the U.S. stock market," Public Choice, Springer, vol. 137(1), pages 43-55, October.
    7. Juan Prieto & Juan Gabriel Rodríguez & Rafael Salas, "undated". "Polarization, Inequality and Tax Reforms," Working Papers 2003-23, FEDEA.
    8. Marco Celentani & J. Conde-Ruiz & Klaus Desmet, 2007. "Inflation in Open Economies with Complete Markets," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 31(2), pages 271-291, May.
    9. Giovannini, Alessandro & Ioannou, Demosthenes & Stracca, Livio, 2022. "Public and private risk sharing: friends or foes? The interplay between different forms of risk sharing," Occasional Paper Series 295, European Central Bank.

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    More about this item

    Keywords

    Endogenous policy; Complete markets; Efficiency; Risk sharing;
    All these keywords.

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D50 - Microeconomics - - General Equilibrium and Disequilibrium - - - General
    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination

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