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Bailouts in federations : is a hard budget constraint always best?

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Besfamille , Martin and Lockwood, Ben (2008) Bailouts in federations : is a hard budget constraint always best? International Economic Review, Vol.49 (No.2). pp. 577-593. doi:10.1111/j.1468-2354.2008.00490.x

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Official URL: http://dx.doi.org/10.1111/j.1468-2354.2008.00490.x

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Abstract

This article analyses hard and soft budget constraints in a federation, where there is a moral hazard problem between the central and the regional governments. Regional governments can avoid a bailout from the center by exerting costly effort. In this setting, a hard budget constraint is not always optimal because it can provide excessive incentives for high effort, and thus discourage investment that is socially efficient. Thus, a hard budget constraint can imply the opposite kind of inefficiency that emerges under a soft budget constraint, where the common pool problem can give rise to inefficiently low effort and overinvestment.

Item Type: Journal Article
Subjects: H Social Sciences > HC Economic History and Conditions
Divisions: Faculty of Social Sciences > Economics
Library of Congress Subject Headings (LCSH): Fiscal policy
Journal or Publication Title: International Economic Review
Publisher: Wiley-Blackwell Publishing, Inc.
ISSN: 0020-6598
Official Date: 6 May 2008
Dates:
DateEvent
6 May 2008Published
Volume: Vol.49
Number: No.2
Page Range: pp. 577-593
DOI: 10.1111/j.1468-2354.2008.00490.x
Status: Peer Reviewed
Access rights to Published version: Restricted or Subscription Access
Version or Related Resource: Besfamille, M. and Lockwood, B. (n.d.). Are hard budget constraints for sub-national governments always efficient. [Coventry]: University of Warwick, Department of Economics. (Warwick economics research paper, no.717).

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