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Too-big-to-fail in federations?

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  • Kalamov, Zarko
  • Staal, Klaas

Abstract

We consider jurisdictions of different population size that provide local public goods with positive spillovers. Matching grants can induce optimal expenditure levels, but the regions can exploit the rationale behind this system to induce bailouts. We formalize the too-big-to-fail result of Wildasin (1997) by proving that it exists in a subgame-perfect Nash equilibrium, in which the central government’s decisions are taken by regional representatives. Furthermore, our model contains the too-big-to-fail and too-small-to-fail outcomes as special cases, and we are the first to derive the conditions under which each result emerges.

Suggested Citation

  • Kalamov, Zarko & Staal, Klaas, 2023. "Too-big-to-fail in federations?," Regional Science and Urban Economics, Elsevier, vol. 101(C).
    • Handle: RePEc:eee:regeco:v:101:y:2023:i:c:s0166046223000522
    DOI: 10.1016/j.regsciurbeco.2023.103917
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    More about this item

    Keywords

    Bailouts; Soft-budget constraints; Spillovers;
    All these keywords.

    JEL classification:

    • H4 - Public Economics - - Publicly Provided Goods
    • H7 - Public Economics - - State and Local Government; Intergovernmental Relations
    • R1 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics

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