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Size and Soft Budget Constraints

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  • Crivelli, Ernesto
  • Staal, Klaas

Abstract

There is much evidence against the so-called "too big to fail" hypothesis in the case of bailouts to sub-national 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 of a district to induce a bailout from the central government and district size are negatively correlated.

Suggested Citation

  • Crivelli, Ernesto & Staal, Klaas, 2006. "Size and Soft Budget Constraints," Bonn Econ Discussion Papers 18/2006, University of Bonn, Bonn Graduate School of Economics (BGSE).
    • Handle: RePEc:zbw:bonedp:182006
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    References listed on IDEAS

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    7. Seitz, Helmut, 1999. "Subnational government bailouts in Germany," ZEI Working Papers B 20-1999, University of Bonn, ZEI - Center for European Integration Studies.
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    11. Massimo Bordignon, 2000. "Problems of Soft Budget Constraints in Intergovernmental Relationships: The Case of Italy," Research Department Publications 3099, Inter-American Development Bank, Research Department.
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    Cited by:

    1. Foremny, Dirk & Solé-Ollé, Albert, 2016. "Who's coming to the rescue? Revenue-sharing slumps and implicit bailouts during the Great Recession," ZEW Discussion Papers 16-049, ZEW - Leibniz Centre for European Economic Research.
    2. Serhan Cevik, 2019. "Policy coordination in fiscal federalism: drawing lessons from the Dubai debt crisis," International Journal of Emerging Markets, Emerald Group Publishing Limited, vol. 14(5), pages 899-915, April.
    3. Karolina Kaiser, 2008. "Restricted Bailouts and the Commitment Problem in Federations," Working Papers 062, Bavarian Graduate Program in Economics (BGPE).
    4. Wildasin, David E., 2007. "Pre–Emption: Federal Statutory Intervention in State Taxation," National Tax Journal, National Tax Association;National Tax Journal, vol. 60(3), pages 649-662, September.
    5. Christos Kotsogiannis & Robert Schwager, 2006. "Fiscal Equalization and Yardstick Competition," Working Papers 2006-15, University of Kentucky, Institute for Federalism and Intergovernmental Relations.
    6. Hikaru Ogawa & David E. Wildasin, 2009. "Think Locally, Act Locally: Spillovers, Spillbacks, and Efficient Decentralized Policymaking," American Economic Review, American Economic Association, vol. 99(4), pages 1206-1217, September.
    7. Dufrénot, G. & Frouté, P. & Schalck, C., 2010. "The French Regions’ Borrowing Behaviours. How heterogeneous are they?," Working papers 289, Banque de France.
    8. Levaggi, Rosella, 2010. "From local to global public goods: How should externalities be represented?," Economic Modelling, Elsevier, vol. 27(5), pages 1040-1042, September.
    9. Ernesto Crivelli, 2012. "Local Governments’ Fiscal Balance, Privatization, and Banking Sector Reform in Transition Countries," IMF Working Papers 2012/146, International Monetary Fund.
    10. International Monetary Fund, 2011. "United Arab Emirates: Selected Issues and Statistical Appendix," IMF Staff Country Reports 2011/112, International Monetary Fund.

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    More about this item

    Keywords

    bailouts; soft-budget constraints; jurisdictional size; public goods; 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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