THE WELFARE ECONOMICS OF COOPERATIVE AND NONCOOPERATIVE FISCAL-POLICY

In the absence of Ricardian equivalence, lump-sum transfers between households within a country can alter the pattern of national saving and consumption, allowing the government to exploit the country's size in world trade and in international borrowing and lending. Redistribution across generations through unfunded social-security retirement schemes or public-sector deficit finance with lump-sum taxes and transfers enables a national planner to affect both the static and intertemporal terms of trade when trade restrictions or discriminatory taxation of asset income are unavailable due to international agreements. The case for cooperative fiscal-policy formation by governments of interdependent economies is examined in an overlapping-generations economy with internationally perfectly mobile capital and a single relative price, the world interest rate. The optimum unfunded social-security scheme when no distortionary tax instruments are allowed is derived for a government with nationalistic social preferences. This policy targets both intergenerational-distribution objectives and interest-rate objectives. The absence of distortionary taxes implies that no overall loss in world surplus need result from the strategic use of lump-sum transfers, so that coordination of intergenerational transfers is unnecessary for Pareto optimality. When internationally enjoyed public goods are introduced, allocational efficiency requires cooperative selection of national exhaustive public-spending programs, but it does not demand that the financing of public expenditures be coordinated. © 1991.