Is Fiscal Cooperation always Sustainable when Regions Differ in Size? Lessons for the EMU

This paper investigates the sustainability of fiscal co-ordination between two regions according to three criteria of co-ordination: tax harmonization, fiscal cooperation and bargaining. We show that in a two-region model in which regions differ in size, bargaining is the only sustainable co-ordination policy when trigger types strategies are implemented. The sustainability of cooperative fiscal policy or tax harmonization depends on the degree of difference in regions' size. When this difference is large, such co-ordinated policies are not sustainable.