Construction of facilities under asymmetric information: do constitutional constraints matter?

This paper studies construction of facilities in a federal state under asymmetric information. A country consists of two regions, each ruled by a local authority. The federal government plans to construct a facility in one of the regions. The facility generates a local value in the host region and has spillover effects in the other region. The federal government does not observe the local value because it is the local authority's private information. 80 the federal governrnent designs an incentive-compatible mechanism, specifying if the facility should be constructed and a balanced scheme of interregional transfers to finance its cost. The federal governrnent is constitutionally constrained to respect a given leveI of each region's welfare. We show that depending upon the facility's local value and the spillover effect, the governrnent faces different incentive problems. Moreover, their existence depends crucially on how stringent constitutional constraints are. Therefore, the optimal mechanism will also depend upon these three features of the model.

Does liquidity constraints matter for Ricardian equivalence?

The paper analysis a general equilibrium model with two periods, several households and a government that has to finance some expenditures in the first period. Households may have some private information either about their type (adverse selection) or about some action levei chosen in the first period that affects the probability of certain states of nature in the second period (moral hazard). Trade of financiai assets are intermediated by a finite collection of banks. Banks objective functions are determined in equilibrium by shareholders. Due to private information it may be optimal for the banks to introduce constraints in the set of available portfolios for each household as wellas household specific asset prices. In particular, households may face distinct interest rates for holding the risk-free asset. The government finances its expenditures either by taxing households in the first period or by issuing bonds in the first period and taxing households in the second period. Taxes may be state-dependent. Suppose government policies are neutml: i) government policies do not affect the distribution of wealth across households; and ii) if the government decides to tax a household in the second period there is a portfolio available for the banks that generates the Mme payoff in each state of nature as the household taxes. Tben, Ricardian equivalence holds if and only if an appropriate boundary condition is satisfied. Moreover, at every free-entry equilibrium the boundary condition is satisfied and thus Ricardian equivalence holds. These results do not require any particular assumption on the banks' objective function. In particular, we do not assume banks to be risk neutral.