This paper considers the design of equalisation transfers in the presence of asymmetric information with respect to the provision cost of regional public output (Adverse selection). To overcome this problem, the central layer of government has to design an optimal incentive-compatible direct...

This paper analyses how fiscal adjustment comes about when both central and sub-national governments are involved in consolidation. We test sustainability of public debt with a fiscal rule for both the federal and regional government. Results for the German Länder show that lower tier...

Control on regional government budgets is important in a monetary union as lower tiers of government have fewer incentives to consolidate debt. According to the Fiscal Theory of the Price Level; unsustainable non-Ricardian fiscal policies eventually force monetary policy to adjust. Hence,...

Devolution of political power is constantly on the political agenda in both Italy and Spain. Fiscal policy in these countries has granted specific privileges to some regions. Valle d’Aosta/Vallée d’Aoste (VdA) and País Vasco/Euskadi (PV) have an extensive say over spending decisions, and...