Endogenous policy leads to inefficient risk sharing

• Published in: Review of economic dynamics Vol. 7; no. 3; pp. 758 - 787
• Main Authors: Celentani, Marco, Conde-Ruiz, J.Ignacio, Desmet, Klaus
• Format: Journal Article
• Language: English
• Published: Orlando Elsevier Inc 01.07.2004; Academic Press
• Subjects: Complete markets; Economic policy; Economic theory; Economics; Efficiency; Endogenous policy; Fiscal policy; Market; Mathematical models; Risk; Risk sharing; Studies; Complete markets; Risk sharing; Endogenous policy; Efficiency

We analyze risk sharing and endogenous fiscal spending in a two-region model with sequentially complete markets. Fiscal policy is determined by majority voting. When policy setting is decentralized, regions choose fiscal spending in an attempt to manipulate security prices. This leads to incomplete...