The Library

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

Tools

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

Preview

PDF
WRAP_Lockwood_IERfinal.pdf - Requires a PDF viewer such as GSview, Xpdf or Adobe Acrobat Reader
Download (327Kb)

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
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).
References:	[1] Azfar, O., S. Kähkönen and P. Meagher (2001), “Conditions for Effective Decentralized Governance: A Synthesis of Research Findings,” Working Paper 256, IRIS Center, University of Maryland. [2] Burki, S., G. Perry and W. Dillinger (1999), “Beyond the Center: Decentralizing the State,” World Bank Latin American and Caribbean Studies 19639. [3] Caplan, A., R. Cornes and E. Silva (2000), “Pure Public Goods and Income Redistribution in a Federation with Decentralized Leadership and Imperfect Labour Mobility”, Journal of Public Economics, 77, 265-284. [4] Dewatripont, M. and E. Maskin (1995), “Credit and Efficiency in Centralized and Decentralized Economies,” Review of Economic Studies, 62, 541-555. [5] Goodspeed, T. (2002), “Bailouts in a Federation,” International Tax and Public Finance, 9, 409-421. [6] Jin, J. and H. Zou (2002), “How Does Fiscal Decentralization Affect Aggregate, National, and Subnational Government Size?,” Journal of Urban Economics, 52, 270-293. [7] Kornai, J., E. Maskin and G. Roland (2003), “Understanding the Soft Budget Constraint,” Journal of Economic Literature, 41, 1095-1136. [8] Köthenbürger, M. (2004), “Tax Competition in a Fiscal Union with Decentralised Leadership,” Journal of Urban Economics, 55, 498-513. [9] Lane, T. (1993), “Market Discipline,” IMF Staff Papers, 40, 53-88. [10] Qian, Y. and G. Roland (1998), “Federalism and the soft-budget constraint”, American Economic Review, 88, 1146-1162. [11] Rodden, J. (2003), “Federalism and Bailouts in Brazil” in Rodden et al. (Eds.) Fiscal Decentralization and the Challenge of Hard Budget Constraints, The MIT Press, Cambridge Massachusetts. [12] Rodden, J., G. Eskeland and J. Litvack (2003), Fiscal Decentralization and the Challenge of Hard Budget Constraints, The MIT Press, Cambridge Massachusetts. [13] Silva, E. and A. Caplan (1997), “Transboundary Pollution Control in Federal Systems”, Journal of Environmental Economics and Management, 34, 173-186. [14] Ter-Minassian, T. (1997), “Decentralization and Macroeconomic Management”, IMF Working Paper 97/155. [15] Ter-Minassian, T., M. Albino-War and R. Singh (2004), “Managing Sub-National Borrowing”, unpublished paper, IMF. [16] Wildasin, D. (1997), “Externalities and Bailouts Hard and Soft Budget Constraints in Intergovernmental Fiscal Relations”, mimeo, Vanderbilt University. [17] World Bank (2000), Entering the 21st Century, World Development Report. [18] World Bank (2005), Country Database on Decentralization.
URI:	http://wrap.warwick.ac.uk/id/eprint/273