FEDERAL FISCAL CONSTITUTIONS - RISK SHARING AND REDISTRIBUTION

The paper studies the political and economic determinants of regional public transfers. Specifically, it focuses on how such transfers are s haped by alternative fiscal constitutions, where a constitution is an allocation of fiscal instruments across different levels of government s plus a procedure for the collective choice of these instruments. Rea listic restrictions on fiscal instruments introduce a tradeoff between risk sharing and redistribution. Different constitutions produce very different results. In particular, a federal social insurance scheme, chosen by voting, provides overinsurance, whereas an intergovernmental transfer scheme, chosen by bargaining, provides underinsurance.