Global public goods, fiscal policy coordination, and welfare in the world economy

A two-region endogenous growth model of the world economy with local and global public goods is used to study strategic interactions between national fiscal authorities. Distortionary levies are used to finance infrastructure investment at home and to generate resources that are transferred to a global public fund for the production of vaccines, which contribute to individual health in both regions. While the global public good is nonexcludable, it is partially rival - its distribution in each region is subject to congestion. Under financial autarky, the cooperative equilibrium is efficient because the benefits of vaccines are fully internalized. Under financial openness, the cooperative equilibrium is also efficient because it preserves the tax base by internalizing the cross-border leakages associated with capital flows. Similar results hold when the health levy takes the form of a wealth tax. However, optimal tax rates are not necessarily higher under cooperation---an important consideration from a policy perspective. Simple numerical experiments are performed to calculate the optimal rates and the gain from cooperation under alternative regimes.