International Tax and Public Finance

, Volume 20, Issue 2, pp 338–356

Size, spillovers and soft budget constraints

Authors

  • Ernesto Crivelli
    • International Monetary Fund
    • IAAKUniversity of Bonn
Article

DOI: 10.1007/s10797-012-9230-3

Cite this article as:
Crivelli, E. & Staal, K. Int Tax Public Finance (2013) 20: 338. doi:10.1007/s10797-012-9230-3

Abstract

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.

Keywords

Bailouts Soft budget constraints District size Spillovers

JEL Classification

H4 H7 R1

Copyright information

© Springer Science+Business Media, LLC 2012