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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 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 | ||||
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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: |
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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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