Revenue Cycles and Risk-Sharing in Local Governments: An Analysis of State Rainy Day Funds

Erick M. Elder and Gary A. Wagner

National Tax Journal, 2013, vol. 66, issue 4, 939-960

Abstract: Rainy day funds are one of the primary tools that state and local policymakers employ to dampen the effects of downturns. However, since state business cycles are not perfectly synchronized, theoretically there should be risk-sharing benefits to governments who pool their fiscal resources over the business cycle. In this paper, we explore the issues associated with local government risk-sharing and provide estimates of the potential benefits to state governments. Our results suggest that a national rainy day fund would provide considerable fiscal benefits to state governments at a lower price than self-insuring through their own rainy day funds.

Date: 2013
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Persistent link: https://EconPapers.repec.org/RePEc:ntj:journl:v:66:y:2013:i:4:p:939-960

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