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This paper evaluates the trade-off between the advantages of risk sharing and the perils of common pool problems in federal fiscal arrangements. Under the assumption of asymmetric information we evaluate two alternative regimes of intergovernmental transfers. In one regime, the central government pre-commits to a certain level of transfers that compensate vertical fiscal imbalances and provide some limited ex-ante insurance. In the other regime, it accommodates expost the fiscal needs of the different provinces. In this second case, full-insurance results, but the economy is subject to a tragedy of the fiscal commons, with excessive subnational spending, insufficient local taxation, and reduced production of federal public goods. We find the range of parameters for which one or the other institutional regime will be preferable. The result is a fiscal-federalism version of the usual trade-off between rules and discretion. Keywords: Common pool; Fiscal federalism; Insurance; Intergovernmental transfers; Risk sharing JEL classification: H71; D82; D81

We posit that the fiscal behavior of Argentine provinces is determined by a common pool game at two levels: within each province, and across political units. In the latter game, the national government has a greater incentive than the provincial governments to internalize the negative externality of fiscal imprudence. Given relatively strong party discipline, the president is able to induce governors from his party to internalize a portion of the externality to a greater extent than opposition governors. In Argentina 'party matters' for fiscal behavior, but it does so for reasons different from those identified in studies of OECD countries.

Most anti-inflation plans have used a nominal exchange rate anchor even though many other variables can serve this role. The conventional wisdom is that an exchange rate anchor imposes more macroeconomic discipline than other anchors, though theory does not yet provide any clear reason why this is so. We explain the link between an exchange rate anchor and discipline with a model that assumes that the public can monitor the nominal exchange rate more easily than it can the other variables. In our model, a Barro--Gordon game of incomplete information with imperfect monitoring, we show that serious stabilizers prefer more visible anchors, such as the nominal exchange rate. We also show that in some circumstances serious stabilizers will choose to fix the exchange rate even when fixed exchange rates have some costs, such as diminished capabilities to respond to external shocks. [C] 1997 Elsevier Science B.V.