International Tax and Public Finance

, Volume 20, Issue 2, pp 338–356

Size, spillovers and soft budget constraints


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


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.


Bailouts Soft budget constraints District size Spillovers 

JEL Classification

H4 H7 R1 

Copyright information

© Springer Science+Business Media, LLC 2012

Authors and Affiliations

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

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