International Tax and Public Finance

, Volume 20, Issue 2, pp 338–356 | Cite as

Size, spillovers and soft budget constraints

Article

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 

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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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