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Review of Economic Design

, Volume 23, Issue 3–4, pp 127–154 | Cite as

Interregional redistribution and budget institutions with private information on intergenerational externality

  • Darong DaiEmail author
  • Liqun Liu
  • Guoqiang Tian
Original Paper

Abstract

We study a federal government’s optimal redistributive policy across regions in the context of a model in which regions issue debt, invest in intergenerational public goods (IPGs), and have private information regarding the durability of their IPG investment. First, in both the complete-information and the asymmetric-information optimum, the region with a higher degree of intergenerational spillovers (H-region) should borrow more than the region with a lower degree (L-region). Second, to induce truth-telling under asymmetric information, the region not distorted on intertemporal allocation should be the contributor of redistribution. Third, the asymmetric-information optimum is implementable through decentralized regional debt decisions by imposing differentiated budget institutions: if H-region is distorted on intertemporal allocation, then it faces a debt floor; if L-region is distorted, then it faces a debt ceiling.

Keywords

Interregional redistribution Regional debt Borrowing rules Asymmetric information Intergenerational public goods 

JEL Classification

H41 H74 H77 D82 

Notes

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Copyright information

© Springer-Verlag GmbH Germany, part of Springer Nature 2019

Authors and Affiliations

  1. 1.Institute for Advanced Research (IAR)Shanghai University of Finance and EconomicsShanghaiPeople’s Republic of China
  2. 2.Private Enterprise Research CenterTexas A&M UniversityCollege StationUSA
  3. 3.Department of EconomicsTexas A&M UniversityCollege StationUSA
  4. 4.Institute for Advanced Studies in Finance and EconomicsHubei University of EconomicsWuhanPeople’s Republic of China

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