Celentani, MarcoConde-Ruiz, J. IgnacioDesmet, KlausCentre for Economic Policy Research2012-05-242012-05-242002-02https://hdl.handle.net/10016/14393We analyze risk sharing and fiscal spending in a two-region model with complete markets. Fiscal policy is determined by majority voting. When policy setting is decentralized, regions choose pro-cyclical fiscal spending in an attempt to manipulate securities prices to their benefit. This leads to incomplete risk sharing, despite the existence of complete markets and the absence of aggregate risk. When a fiscal union centralizes fiscal policy, securities prices can no longer be manipulated and complete risk sharing ensues. If regions are homogeneous, median income residents of both regions prefer the fiscal union. If they are heterogeneous, the median resident of the rich region prefers the decentralized settingapplication/pdfengAtribución-NoComercial-SinDerivadas 3.0 EspañaFiscal policyVotingRisk sharingworking paperC72D72E61Economíaopen access