Is It Is or Is It Ain't My Obligation? Regional Debt in a Fiscal Federation

Russell Cooper, Hubert Kempf, Dan Peled

Research output: Contribution to journalArticlepeer-review


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.
Original languageEnglish
JournalNational Bureau of Economic Research Working Paper Series
StatePublished - 2005

Bibliographical note

Author contact info: Russell Cooper Department of Economics Villa La Fonte Via delle Fontanelle 18 I-50014 San Domenico di Fiesole (FI) ITALY Europe E-Mail: [email protected] Hubert Kempf Ecole Normale Superieure, Cachan E-Mail: [email protected] Dan Peled Department of Economics University of Haifa Haifa 31905, ISRAEL E-Mail: [email protected]


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