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Causes and Consequences of Bailing out Expectations of Subcentral Governments: Theory and Evidence from the Italian Regions

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  • Fabio Padovano

    (CREM-CNRS and Condorcet Center, University of Rennes 1 (France) & DIPES-Università Roma Tre (Italy))

Abstract

This paper examines the strategic interactions among the central and a subcentral government where incomplete information forces both to form expectations about the other’s behaviour, especially the probability that the central government will bail out the local one. Various determinants and outcomes of the strategic interaction are explored. The model generates empirical restrictions about the central government’s transfer decisions and the lower government’s spending behaviour. These restrictions are tested on a sample of 20 Italian Regions. Data show that bailing out expectations are a quantitatively important component of local government spending.

Suggested Citation

  • Fabio Padovano, 2011. "Causes and Consequences of Bailing out Expectations of Subcentral Governments: Theory and Evidence from the Italian Regions," Economics Working Paper Archive (University of Rennes & University of Caen) 201128, Center for Research in Economics and Management (CREM), University of Rennes, University of Caen and CNRS.
    • Handle: RePEc:tut:cremwp:201128
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    References listed on IDEAS

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    1. Timothy Goodspeed, 2002. "Bailouts in a Federation," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 9(4), pages 409-421, August.
    2. Padovano, Fabio, 2012. "The drivers of interregional policy choices: Evidence from Italy," European Journal of Political Economy, Elsevier, vol. 28(3), pages 324-340.
    3. János Kornai, 2014. "The soft budget constraint," Acta Oeconomica, Akadémiai Kiadó, Hungary, vol. 64(supplemen), pages 25-79, November.
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    5. Mueller,Dennis C., 2003. "Public Choice III," Cambridge Books, Cambridge University Press, number 9780521894753, October.
    6. Pettersson-Lidbom, Per & Dahlberg, Matz, 2003. "An Empirical Approach for Evaluating Soft Budget Constraints," Working Paper Series 2003:28, Uppsala University, Department of Economics.
    7. Maria Flavia Ambrosanio & Massimo Bordignon & Floriana Cerniglia, 2010. "Constitutional Reforms, Fiscal Decentralization and Regional Fiscal Flows in Italy," Chapters, in: Núria Bosch & Marta Espasa & Albert Solé Ollé (ed.), The Political Economy of Inter-Regional Fiscal Flows, chapter 4, Edward Elgar Publishing.
    8. Padovano, Fabio & Venturi, Larissa, 2001. "Wars of Attrition in Italian Government Coalitions and Fiscal Performance: 1948-1994," Public Choice, Springer, vol. 109(1-2), pages 15-54, October.
    9. Jonathan A. Rodden & Gunnar S. Eskeland (ed.), 2003. "Fiscal Decentralization and the Challenge of Hard Budget Constraints," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262182297, April.
    10. Gaimpaolo Arachi & Alberto Zanardi, 2004. "Designing Intergovernmental Fiscal Relations: Some Insights from the Recent Italian Reform," Fiscal Studies, Institute for Fiscal Studies, vol. 25(3), pages 325-365, September.
    11. M. Dewatripont & E. Maskin, 1995. "Credit and Efficiency in Centralized and Decentralized Economies," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 62(4), pages 541-555.
    12. Luigi Cannari & G. D'Alessio, 2002. "La distribuzione del reddito e della ricchezza nelle regioni italiane," Rivista economica del Mezzogiorno, Società editrice il Mulino, issue 4, pages 809-848.
    13. Brambor, Thomas & Clark, William Roberts & Golder, Matt, 2006. "Understanding Interaction Models: Improving Empirical Analyses," Political Analysis, Cambridge University Press, vol. 14(1), pages 63-82, January.
    14. Arulampalam, Wiji & Dasgupta, Sugato & Dhillon, Amrita & Dutta, Bhaskar, 2009. "Electoral goals and center-state transfers: A theoretical model and empirical evidence from India," Journal of Development Economics, Elsevier, vol. 88(1), pages 103-119, January.
    15. Per Pettersson-Lidbom, 2010. "Dynamic Commitment and the Soft Budget Constraint: An Empirical Test," American Economic Journal: Economic Policy, American Economic Association, vol. 2(3), pages 154-179, August.
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    Cited by:

    1. Fabio Padovano, 2014. "Distribution of transfers and soft budget spending behaviors: evidence from Italian regions," Public Choice, Springer, vol. 161(1), pages 11-29, October.
    2. Padovano, Fabio, 2012. "The drivers of interregional policy choices: Evidence from Italy," European Journal of Political Economy, Elsevier, vol. 28(3), pages 324-340.
    3. Jean-Michel Josselin & Fabio Padovano & Yvon Rocaboy, 2013. "Grant legislation vs. political factors as determinants of soft budget spending behaviors. Comparison between Italian and French regions," European Journal of Comparative Economics, Cattaneo University (LIUC), vol. 10(3), pages 317-354, December.

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    More about this item

    Keywords

    Expectations; intergovernmental relations; transfers; local public spending; bailing out; positive analysis;
    All these keywords.

    JEL classification:

    • H71 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Taxation, Subsidies, and Revenue
    • H73 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Interjurisdictional Differentials and Their Effects
    • H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism
    • D78 - Microeconomics - - Analysis of Collective Decision-Making - - - Positive Analysis of Policy Formulation and Implementation

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