 Federal Fiscal Constitutions. Part I: Risk Sharing and Moral HazardTorsten Persson () and Guido Tabellini No 93-04, EPRU Working Paper Series from Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics Abstract: Inspired by the current European developments, we study equilibrium fiscal policy under alternative "federal" arrangements. Our model has two levels of government. Local policy redistributes across individuals and affects the probability of aggregate shocks, whereas federal policy shares international risk. Policies are chosen under majority rule. There is a tradeoff between risk-sharing and moral hazard: federal risk-sharing can induce local governments to enact policies that increase local risk. We analyze this tradeoff under alternative fiscal constitutions. In particular, we contrast a vertically ordered system like the EC with a horizontally ordered federal system like the US. These alternative arrangements create different incentives for policymakers and voters, and give rise to different political equilibria. Under appropriate institutions, centralization of functions and power can mitigate the moral hazard problem. References: Add references at CitEc There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it. Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:kud:epruwp:93-04 Access Statistics for this paper More papers in EPRU Working Paper Series from Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics �ster Farimagsgade 5, Building 26, DK-1353 Copenhagen K., Denmark. Contact information at EDIRC. |
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