The Welfare Economics of Cooperative and Noncooperative Fiscal Policy
Willem H. Buiter
Kenneth M. Kletzer
In a competitive two-country overlapping generations model with perfect
capital mobility, a plan that is individually Pareto optimal (that is Pareto
optimal with respect to individual preferences) can be sustained without
coordination of national fiscal policies when the fiscal arsenal is restricted
to lump-sum taxes and government borrowing. Cooperation is required to achieve
a Pareto optimum with respect to the two utilitarian national social welfare
functions. Cooperation and international side payments are required to achieve
an optimum with respect to a utilitarian global social welfare function.
Without international lump-sum transfers, when distortionary taxes on
capital income are permitted, Pareto optima with respect to national social
welfare functions and global social welfare optima will not be individual
Pareto optima: efficiency is traded off for a more desirable intergenerational
and international distribution of resources.
With nationally provided international public goods, the achievement of
individual Pareto efficiency requires coordination of public spending but not
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