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Size, spillovers and soft budget constraints

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  • Ernesto Crivelli
  • Klaas Staal

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. Copyright Springer Science+Business Media, LLC 2013

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  • Ernesto Crivelli & Klaas Staal, 2013. "Size, spillovers and soft budget constraints," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 20(2), pages 338-356, April.
    • Handle: RePEc:kap:itaxpf:v:20:y:2013:i:2:p:338-356
    DOI: 10.1007/s10797-012-9230-3
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    More about this item

    Keywords

    Bailouts; Soft budget constraints; District size; Spillovers; H4; H7; R1;
    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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