Who benefits from international fiscal cooperation? The role of cross-country asymmetries

Abstract

Within a unified general equilibrium framework, we revisit the problem of international fiscal competition and cooperation when countries differ in some core economic fundamentals. We focus on cross-country differences in productivity, initial public debt and institutional quality. Solving for non-symmetric equilibria, both non-cooperative and cooperative, we show that international fiscal cooperation can create winners and losers even if it is superior to non-cooperation at aggregate level. In particular, our solutions imply that international cooperation hurts those countries with low productivity and poor institutional quality. By contrast, it benefits those countries with fragile public finances.