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 shaped by alternative fiscalconstitutions, where a constitution is an allocation of fiscal instruments across different levels of governments plus a procedure for the collective choice of these instruments. Realistic restrictions on fiscal instruments introduce a trade-off 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