Alessandra Casella

Federalism and clubs: Towards an economic theory of overlapping political jurisdictions

The debate on fiscal federalism in the European Community has become intense as the deadline for the creation of a single market draws nearer. This development stems from two broad classes of reasons. First of all, there are immediate effects from markets’ integration. Without barriers to trade taxes may need to be harmonized, compromising the ability of any single country to pursue policies in isolation. Redistributive measures in particular will have to be deferred to the Community [see, for example, van Rompuy, Abraham and Heremans (1990)]. At the same time, the movement to a single market will probably benefit some countries and harm others. The need to compensate the losers implies again a widened fiscal role for the Community. These are the main motivations behind the anticipated doubling of the Community’s Structural Funds from ECU 7.7 billions in 1988 to ECU 14.5 billions by 1993 (in 1988 prices).’ The second contribution to the current debate stems more generally from reflections upon the link between the evolution of private markets and the establishment of new institutions. We define markets as sets of rules for the exchange of private goods, and institutions as organizations for the provision

Can Foreign Aid Accelerate Stabilization

This paper studies the effect of foreign aid on economic stabilization. Following Alesina and Drazen (1991), we model the delay in stabilizing as the result of a distributional struggle: reforms are postponed because they are costly and each distributional faction hopes to reduce its share of the cost by outlasting its opponents in obstructing the required policies. Since the delay is used to signal each factions strength, the effect of the transfer depends on the role it plays in the release of information. We show that this role depends on the timing of the transfer: foreign aid decided and transferred sufficiently early into the game leads to earlier stabilization; but aid decided or transferred too late is destabilizing and encourages further postponement of reforms.

Testing for rational bubbles with exogenous or endogenous fundamentals : The German hyperinflation once more

Abstract The presence of rational price bubbles during the German hyperinflation is tested under two different structural assumptions on the money process. If the money supply is constrained to be exogenous to the current inflation rate, the hypothesis of no bubble can be rejected. However, this is no longer found to be true when a feedback rule from inflation to money creation is allowed. The analysis contradicts previous results presented in the literature.

On market integration and the development of institutions: The case of international commercial arbitration

Abstract This paper suggests that the institutional basis necessary to support efficient international trade is provided not only by treaties among national governments but also by international coalitions of private agents. International commercial arbitration is an important example of these private coalitions. The paper reviews the provisions and the practice of international arbitration, and presents a general equilibrium model of the relationship between the expansion of international trade and the adoption of arbitration. The model shows that arbitration alters the size and composition of markets, while at the same time responding to exogenous changes in trade.

Management of a Common Currency

This paper presents a simple general equilibrium model of two countries using a common currency. The goal is to study how the monetary arrangement influences the optimum financing of a public good. If the two countries are allowed to print the common currency autonomously, they will finance their fiscal spending with money, oversupplying the public good and crowding out the private sector. The possibility to export part of the inflation creates a distortion in incentives such the resulting equilibrium is strictly welfare inferior to the one prevailing under flexible exchange rates. If the management of the common currency is deferred to an international central bank, each country will try to use domestic policy variables (taxes) to manipulate in its favor the actions of the bank. With no independent domestic taxes, the bank can improve welfare. However, its policies naturally support the larger country, and to induce the smaller one to participate requires giving it a disproportionately large, politically unrealistic, representation in the banks objective function.

Tradable Deficit Permits

The current provisions of the Stability and Growth Pact (hereafter, SGP) advocate balanced budgets in the longer term and specify a ceiling for deficit spending of 3 per cent of GDP for each member of the European Monetary Union. A violation of the ceiling will trigger warnings and eventually penalties (unless exceptional circumstances can be invoked). In this form, the Pact suffers from several shortcomings that will limit its effectiveness and impose exceptional costs on at least some of the member countries.

Why Personal Ties Cannot Be Bought

Personal connections can function as privileged channels of information and trust. When the reliability of information is particularly important applying for a job, needing capital for a new enterprise, moving to a new country their role often becomes crucial. Hence the ethnic enclaves, both residential and professional, in New York City; the economic weight of the Overseas Chinese in their countries of residence; the success of Medieval networks of merchants, organized along ethnic or religious lines. Personal networks are often very successful, but they are by their nature discriminatory and thus tend to generate resentment and opposition among those excluded. Economists and sociologists debate whether networks can be replicated artificially. Not surprisingly, economists tend to be more optimistic, believing that appropriate market mechanisms, encouraged and supported by policy where necessary, can substitute for the missing personal channels. Sociologists on the other hand, see the personal, spontaneous link as the essence of the relation, and thus as something that by its nature cannot be replicated at will (e.g. Marta Tienda and Rebeca Raijman (2001), discussing James E. Rauch (2001)). We address this question in a simple model of labor markets where workers differ in their unobservable productivity. We ask how signaling the possibility of engaging

Agenda control as a cheap talk game: Theory and experiments with Storable Votes☆

The paper studies a committee voting sequentially on a known series of binary proposals. Each member is granted, in addition to a vote for each proposal, a single extra bonus vote - a streamlined version of Storable Votes. When the order of the agenda is exogenous, a sufficient condition guarantees the existence of welfare gains, relative to simple majority voting. But is efficiency compromised if a chair controls the order of the agenda? The agenda becomes cheap talk and can be used to transmit information about the chairs priorities. The game has multiple equilibria, differing in the precision of the information transmitted, but the welfare impact is minor, and the comparison to simple majority voting is unchanged. In laboratory experiments, subjects have difficulty identifying the informative strategies, but payoffs are effectively identical to theoretical predictions. The bonus vote matters; the chairs control of the agenda does not.

Voting on the Adoption of a Common Currency

Two countries adopting a common currency share the same monetary policy and save on transaction costs. This paper studies the impact of these two factors on the composition of markets. The establishment of a monetary union alters the boundaries between domestic and international markets and triggers distributional effects, creating disagreement among citizens over the desirability of the union. The outcome of a referendum on the choice between national currencies and monetary union depends on the countrys level of development, suggesting that a common currency will be favoured by a majority of traders in both countries only at a particular stage.

Trading Votes for Votes. A Decentralized Matching Algorithm

Vote-trading is common practice in committees and group decision-making. Yet we know very little about its properties. Inspired by the similarity between the logic of sequential rounds of pairwise vote-trading and matching algorithms, we explore three central questions that have parallels in the matching literature: (1) Does a stable allocation of votes always exists? (2) Is it reachable through a decentralized algorithm? (3) What welfare properties does it possess? We prove that a stable allocation exists and is always reached in a finite number of trades, for any number of voters and issues, for any separable preferences, and for any rule on how trades are prioritized. Its welfare properties however are guaranteed to be desirable only under specific conditions. A laboratory experiment confirms that stability has predictive power on the vote allocation achieved via sequential pairwise trades, but lends only weak support to the dynamic algorithm itself.