Endogenous Policy Leads to Inefficient Risk-Sharing

Marco Celentani (), Klaus Desmet and J. Ignacio Conde-Ruiz

No 3866, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: We analyse 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 pro-cyclical fiscal spending in an attempt to manipulate security prices to their benefit. 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, security prices can no longer be manipulated and 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.

Keywords: Endogenous policy; Complete markets; Efficiency; Risk-sharing (search for similar items in EconPapers)
JEL-codes: C72 D50 D72 E61 (search for similar items in EconPapers)
Date: 2003-04
New Economics Papers: this item is included in nep-geo and nep-pol
References: Add references at CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
https://cepr.org/publications/DP3866 (application/pdf)

Related works:
Journal Article: Endogenous Policy Leads to Inefficient Risk Sharing (2004)
Working Paper: Endogenous policy leads to inefficient risk sharing (2003)
Working Paper: Endogenous Policy Leads to Inefficient Risk Sharing
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:3866

Ordering information: This working paper can be ordered from
https://cepr.org/publications/DP3866

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 ().