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Intergovernmental Transfers and Fiscal Behavior: Insurance versus Aggregate Discipline

  • Mariano Tommasi

    ()

    (Department of Economics, Universidad de San Andres & Center of Studies for Institutional Development)

  • Pablo Sanguinetti

    (Universidad Torcuato Di Tella)

This paper evaluates the trade-off between the advantages of risk sharing and the perils of common pool problems in federal fiscal arrangements. Under the assumption of asymmetric information we evaluate two alternative regimes of intergovernmental transfers. In one regime, the central government pre-commits to a certain level of transfers that compensate vertical fiscal imbalances and provide some limited ex-ante insurance In the other regime, it accommodates ex-post the fiscal needs of the different provinces In this second case, full-insurance results, but the economy is subject to a tragedy of the fiscal commons, with excessive subnational spending, insufficient local taxation, and reduced production of federal public goods We find the range of parameters for which one or the other institutional regime will be preferable. The result is a fiscal-federalism version of the usual trade off between rules and discretion.

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File URL: ftp://webacademicos.udesa.edu.ar/pub/econ/doc60.pdf
File Function: First version, 2003
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Paper provided by Universidad de San Andres, Departamento de Economia in its series Working Papers with number 60.

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Length: 40 pages
Date of creation: Aug 2003
Date of revision: Aug 2003
Handle: RePEc:sad:wpaper:60
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