June 15, 2006 Russell Cooper: Is it is or is it Ain't my Obligation? Regional Debt in a Fiscal Federation
The seminar will be held in the Visitor Centre at 1:30 pm.
Russell Cooper
Department of Economics, University of Texas, Austin,
Abstract
This paper studies the repayment of regional debt in a multi-region economy with a central authority: who pays the obligation issued by a region? With commitment, a central government will use its taxation power to smooth distortionary taxes across regions. Absent commitment, the central government may be induced to bailout the regional government in order to smooth consumption and distortionary taxes across the regions. We characterize the conditions under which bailouts occur and their welfare implications. The gains to creating a federation are higher when the (government spending) shocks across regions are negatively correlated and volatile. We use these insights to comment on actual fiscal relations in three quite different federations: the US, the European Union and Argentina.