Economic Risk and Political Risk in Fiscal Unions

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Economic Risk and Political Risk in Fiscal Unions

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Title: Economic Risk and Political Risk in Fiscal Unions
Author: Perotti, Roberto; Alesina, Alberto

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Citation: Alesina, Alberto, and Roberto Perotti. 1998. Economic risk and political risk in fiscal unions. Economic Journal 108(449): 989-1008.
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Abstract: A fiscal programme that redistributes income from rich to poor individuals indirectly redistributes tax revenues from regions hit by a favourable shock to regions hit by an unfavourable one. Centralised fiscal redistribution has therefore been advocated as a way to insure individuals against region-specific shocks. In this paper, we argue that a centralised fiscal policy, while reducing the uncertainty on the tax base, may create additional uncertainty on the tax rate. Using a simple model we show that the higher uncertainty on the policy instrument might more than offset the lower uncertainty on the tax base.
Published Version: doi:10.1111/1468-0297.00326
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