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Soft-Budget Constraints and Local Expenditures

Author

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  • Takero Doi

    (Faculty of Economics, Keio University)

  • Toshihiro Ihori

    (Faculty of Economics, University of Tokyo)

Abstract

This paper investigates how the soft budget constraint with grants from the central government to local governments tends to exaggerate inefficient local expenditures. We first develop a theoretical model, which explains soft budget problem in a multi-government setting. We then show that in Japan's case local governments implemented inefficient public investments and hence the bad outcome of soft budget problem occurred in the 1990s.

Suggested Citation

  • Takero Doi & Toshihiro Ihori, 2006. "Soft-Budget Constraints and Local Expenditures," CIRJE F-Series CIRJE-F-422, CIRJE, Faculty of Economics, University of Tokyo.
    • Handle: RePEc:tky:fseres:2006cf422
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    File URL: http://www.cirje.e.u-tokyo.ac.jp/research/dp/2006/2006cf422.pdf
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    References listed on IDEAS

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    Cited by:

    1. Shun-ichiro Bessho, 2017. "A case study of central and local government finance in Japan," Chapters, in: Naoyuki Yoshino & Peter J. Morgan (ed.), Central and Local Government Relations in Asia, chapter 9, pages 306-332, Edward Elgar Publishing.
    2. Miyazaki, Tomomi, 2009. "Public investment and business cycles: The case of Japan," Journal of Asian Economics, Elsevier, vol. 20(4), pages 419-426, September.
    3. Ritika Jain, 2018. "Contributions to the exchequer funds by state level public sector enterprises: does political alignment matter?," Constitutional Political Economy, Springer, vol. 29(1), pages 93-113, March.
    4. Thushyanthan Baskaran, 2013. "Do bailouts buy votes? Evidence from a panel of Hessian municipalities," Economics of Governance, Springer, vol. 14(3), pages 257-278, August.
    5. Tomomi Miyazaki, 2010. "Local Public Sector Investment and Stabilization Policy : Evidence from Japan," Public Policy Review, Policy Research Institute, Ministry of Finance Japan, vol. 6(1), pages 153-166, February.
    6. Baskaran, Thushyanthan, 2012. "Soft budget constraints and strategic interactions in subnational borrowing: Evidence from the German States, 1975–2005," Journal of Urban Economics, Elsevier, vol. 71(1), pages 114-127.
    7. Thushyanthan Baskaran, 2017. "Local fiscal policy after a bailout: austerity or soft budget constraints?," Economics of Governance, Springer, vol. 18(3), pages 209-238, August.
    8. Bessho, Shun-ichiro & Ogawa, Hikaru, 2015. "Fiscal adjustment in Japanese municipalities," Journal of Comparative Economics, Elsevier, vol. 43(4), pages 1053-1068.
    9. Baskaran, Thushyanthan, 2014. "Bailouts and austerity," University of Göttingen Working Papers in Economics 212, University of Goettingen, Department of Economics.

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