IS IT IS OR IS IT AIN'T MY OBLIGATION? REGIONAL DEBT IN A FISCAL FEDERATION

Russell Cooper, Hubert Kempf () and Dan Peled ()

International Economic Review, 2008, vol. 49, issue 4, 1469-1504

Abstract: This article studies the repayment of regional debt in a multiregion economy with a central authority: Who pays the obligation issued by a region? With commitment, the central government will use its economy-wide taxation power in support of its objective to smooth distortionary taxes and consumption across regions. Absent commitment, this tool of the central government may be exploited to induce it to bail out regional government deficits. We characterize the conditions under which bailouts occur and their welfare implications. In particular, we show when the gains from a federation may outweigh the welfare costs of a bailout. We use these insights to comment on actual fiscal relations in three quite different federations: the United States, the European Union, and Argentina. Copyright © (2008) by the Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

Date: 2008
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Related works:
Working Paper: Is it is or is it ain't my obligation? Regional debt in a fiscal federation (2005)
Working Paper: Is It Is or Is It Ain't My Obligation? Regional Debt in a Fiscal Federation (2005)
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