Endogenous policy leads to inefficient risk sharing

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

Economics Working Papers from Department of Economics and Business, Universitat Pompeu Fabra

Abstract: We analyze risk sharing and fiscal spending in a two-region model with complete markets. Fiscal policy determines tax rates for each state of nature. When fiscal policy is decentralized, it can be used to affect prices of securities. To manipulate prices to their beneffit, regions choose pro-cyclical fiscal spending. 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, securities prices can no longer be manipulated and complete risk sharing ensues. If regions are homogeneous, median income residents of both regions prefer the fiscal union. If they are heterogeneous, the median resident of the rich region prefers the decentralized setting.

Keywords: Interregional risk-sharing; complete markets (search for similar items in EconPapers)
JEL-codes: C72 D50 D72 E61 (search for similar items in EconPapers)
Date: 2002-01, Revised 2003-03
New Economics Papers: this item is included in nep-ias
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

Downloads: (external link)
https://econ-papers.upf.edu/papers/593.pdf Whole Paper (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:upf:upfgen:593

Access Statistics for this paper

More papers in Economics Working Papers from Department of Economics and Business, Universitat Pompeu Fabra
Bibliographic data for series maintained by ( this e-mail address is bad, please contact ).