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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. ISSN 0020-6598

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

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
Volume:	Vol.49
Number:	No.2
Page Range:	pp. 577-593
Identification Number:	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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URI:	http://wrap.warwick.ac.uk/id/eprint/273