Size, spillovers and soft budget constraints
Purchase on Springer.com
$39.95 / €34.95 / £29.95*
Rent the article at a discountRent now
* Final gross prices may vary according to local VAT.
There is much evidence against the so-called “too big to fail” hypothesis in the case of bailouts to subnational governments. We look at a model where districts of different size provide local public goods with positive spillovers. Matching grants of a central government can induce socially-efficient provision, but districts can still exploit the intervening central government by inducing direct financing. We show that the ability and willingness of a district to induce a bailout and district size are negatively correlated. Furthermore, we argue that these policies can be equilibrium strategies.
- Besley, T., & Coate, S. (2003). Central versus local provision of public goods: a political economy analysis. Journal of Public Economics, 87(12), 2611–2637. CrossRef
- Bordignon, M. (2000). Problems of soft budget constraints in intergovernmental relationships: the case of Italy (Research Network Working Papers R-398). Inter-American Development Bank.
- Breuille, M. L., Madies, T., & Taugourdeau, E. (2006). Does tax competition soften regional budget constraint? Economics Letters, 90(2), 230–236. CrossRef
- Caplan, A. J., Cornes, R. C., & Silva, E. C. D. (2000). Pure public goods and income redistribution in a federation with decentralized leadership and imperfect labor mobility. Journal of Public Economics, 77(2), 265–284. CrossRef
- Dahlberg, M., & Petterson-Lidbom, P. (2003). An empirical approach for evaluating soft budget constraints (Working Paper 28). Uppsala University.
- Dewatripont, M., & Maskin, E. (1995). Credit and efficiency in centralized and decentralized economies. Review of Economic Studies, 62(4), 541–555. CrossRef
- Dillinger, W., & Webb, S. (1999). Fiscal management in federal democracies: Argentina and Brazil (World Bank Policy Working Paper 2121).
- Feidler, J., & Staal, K. (2012). Centralized and decentralized provision of public goods. Economics of Governance, 13(1), 73–93. CrossRef
- Goodspeed, T. (2002). Bailouts in a federation. International Tax and Public Finance, 9(4), 409–421. CrossRef
- Inman, R. (1995). How to have a fiscal crisis: lessons from Philadelphia. American Economic Review, 85(2), 378–383.
- Inman, R. (2001). Transfers and bailouts: enforcing local fiscal discipline with lessons from US federalism. In J. Rodden, G. Eskelund, & J. Litvack (Eds.), Fiscal decentralization and the challenge of hard budget constraints. Cambridge: MIT Press.
- Kornai, J. (1986). The soft budget constraint. Kyklos, 39(1), 3–30. CrossRef
- Maskin, E. (1999). Recent theoretical work on the soft budget constraint. American Economic Review, 89(2), 421–425. CrossRef
- Nicollini, J. P., Posadas, J., Sanguinetti, J., Sanguinetti, P., & Tommasi, M. (2002). Decentralization, fiscal discipline in sub-national governments and the bailout problem: the case of Argentina (Research Network Working Papers R-467). Inter-American Development Bank.
- Qian, Y., & Roland, G. (1998). Federalism and the soft budget constraint. American Economic Review, 88(5), 1143–1162.
- Rodden, J. (2003). Soft budget constraints and German federalism. In J. Rodden (Ed.), Fiscal decentralization and the challenge of hard budget constraints. Cambridge: MIT Press.
- Sanguinetti, P., & Tommasi, M. (2004). Intergovernmental transfers and fiscal behavior: insurance versus aggregate discipline. Journal of International Economics, 62(1), 149–170. CrossRef
- Seitz, H. (1999). Subnational government bailouts in Germany (ZEI Working Paper B20).
- Stein, E. (1999). Fiscal decentralization and government size in Latin America. Journal of Applied Economics, 2(2), 357–391.
- Von Hagen, J., Bordignon, M., Dahlberg, M., Grewal, B., Petterson, P., & Seitz, H. (2000). Subnational government bailouts in OECD countries: four case studies (Research Network Working Paper R-399). Inter-American Development Bank.
- Wildasin, D. E. (1997). Externalities and bailouts: hard and soft budget constraints in intergovernmental fiscal relations (Mimeo). Vanderbilt University.
- Size, spillovers and soft budget constraints
International Tax and Public Finance
Volume 20, Issue 2 , pp 338-356
- Cover Date
- Print ISSN
- Online ISSN
- Springer US
- Additional Links
- Soft budget constraints
- District size
- Industry Sectors