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Soft Budget Constraints as a Risk Sharing Arrangement in an Economic Federation

Author

Listed:
  • Lindahl, Erica

    (Department of Economics)

  • Westermark, Andreas

    (Department of Economics)

Abstract

We analyze a model where the federal government provides risk sharing arrangements to municipalities investing in a local public good. The risk sharing arrangements are an income equalization system and a system allowing for a soft budget constraint, i.e., a bailout. Our main result is that a bailout system in combination with income equalization can be a more efficient risk sharing arrangement than an income equalization system only. Thus, the introduction of a bailout system is welfare improving.

Suggested Citation

  • Lindahl, Erica & Westermark, Andreas, 2006. "Soft Budget Constraints as a Risk Sharing Arrangement in an Economic Federation," Working Paper Series 2006:5, Uppsala University, Department of Economics.
    • Handle: RePEc:hhs:uunewp:2006_005
    as

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    References listed on IDEAS

    as
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    5. J. Kornai & E. Maskin & G. Roland, 2004. "Understanding the Soft Budget Constraint," Voprosy Ekonomiki, NP Voprosy Ekonomiki, issue 11.
    6. Thomas Aronsson & Magnus Wikstrom, 2003. "Optimal taxation and risk-sharing arrangements in an economic federation," Oxford Economic Papers, Oxford University Press, vol. 55(1), pages 104-120, January.
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    More about this item

    Keywords

    Bailout; Fiscal federalism;

    JEL classification:

    • H72 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Budget and Expenditures
    • H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism

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