Fiscal Unions with Present Biased Governments

Jacopo Orlandi and Facundo Piguillem

No 20147, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: This paper studies the relationship between fiscal rules and intergovernmental transfers within a federation. We analyze an environment where present-biased governments must insure against future shocks. The present bias generates a reason for fiscal rules to exist, while risk sharing motives bring out the need for transfers. A central authority designs the optimal combination of state contingent transfers and fiscal rules that maximize the federation's welfare. We show that independently of the present bias, it is optimal to achieve the first-best pattern of aggregate spending. However, how it is implemented depends on the intensity of the bias. When the bias is mild, a mechanism akin to an emergency fund with tight fiscal rules arises, while when the bias is severe, it is optimal to provide loans with contingent payments and to loosen up fiscal rules. Moreover, there is always a degree of bias for which a fiscal union is not optimal.

JEL-codes: D82 E62 H62 (search for similar items in EconPapers)
Date: 2025-04
References: Add references at CitEc
Citations:

Downloads: (external link)
https://cepr.org/publications/DP20147 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:20147

Ordering information: This working paper can be ordered from
https://cepr.org/publications/DP20147

Access Statistics for this paper

More papers in CEPR Discussion Papers from Centre for Economic Policy Research 33 Great Sutton Street, London EC1V 0DX, UK.
Bibliographic data for series maintained by CEPR ().