Intergovernmental Transfers and Fiscal Behavior: Insurance versus Aggregate Discipline

Mariano Tommasi and Pablo Sanguinetti

No 60, Working Papers from Universidad de San Andres, Departamento de Economia

Abstract: This paper evaluates the trade-off between the advantages of risk sharing and the perils of common pool problems in federal fiscal arrangements. Under the assumption of asymmetric information we evaluate two alternative regimes of intergovernmental transfers. In one regime, the central government pre-commits to a certain level of transfers that compensate vertical fiscal imbalances and provide some limited ex-ante insurance In the other regime, it accommodates ex-post the fiscal needs of the different provinces In this second case, full-insurance results, but the economy is subject to a tragedy of the fiscal commons, with excessive subnational spending, insufficient local taxation, and reduced production of federal public goods We find the range of parameters for which one or the other institutional regime will be preferable. The result is a fiscal-federalism version of the usual trade off between rules and discretion.

Keywords: Fiscal federalism; intergovernmental transfers; insurance; risk sharing; common pool (search for similar items in EconPapers)
JEL-codes: D81 D82 H71 (search for similar items in EconPapers)
Pages: 40 pages
Date: 2003-08, Revised 2003-08
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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https://webacademicos.udesa.edu.ar/pub/econ/doc60.pdf First version, 2003 (application/pdf)

Related works:
Journal Article: Intergovernmental transfers and fiscal behavior insurance versus aggregate discipline (2004)
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Persistent link: https://EconPapers.repec.org/RePEc:sad:wpaper:60

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