International Tax and Public Finance

, Volume 20, Issue 2, pp 338–356

Size, spillovers and soft budget constraints

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

BailoutsSoft budget constraintsDistrict sizeSpillovers

JEL Classification

H4H7R1

Copyright information

© Springer Science+Business Media, LLC 2012

Authors and Affiliations

  1. 1.International Monetary FundWashington DCUSA
  2. 2.IAAKUniversity of BonnBonnGermany