Inter-regional insurance

This paper considers the problem facing a central government which can insu re regional governments (by use of intergovernmental grants) against region -specific and privately observed shocks either to income, or demand for, or cost of, the public good. Notable results are: (i) depending on the source of the shock, the grant may induce over- or undersupply of the public good relative to the Samuelson rule; (ii) with public good spillovers between r egions, there is two-way distortion of public good supply - that is, qualit atively different distortions (relative to the Samuelson rule) for differen t values of the shock; (iii) the solution to the central government's probl em may depend qualitatively on whether regional taxation is lump-sum or dis tortionary. (C) 1999 Elsevier Science S.A. All rights reserved.