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Dynamic Commitment and the Soft Budget Constraint: An Empirical Test

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  • Per Pettersson-Lidbom

Abstract

This paper develops an empirical framework for the problem of soft budgets which is explicitly based on a dynamic commitment problem, i.e., the inability of a supporting organization to commit itself not to extend more resources ex post to a budget-constrained organization than it was prepared to provide ex ante. Swedish local governments are used as a testing ground since the central government distributed a large number of fiscal transfers. The estimated soft-budget effect is economically significant: on average, a local government increases its debt by more than 20 percent by going from a hard to a soft budget constraint. (JEL D82, G32, L32)

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File URL: http://www.aeaweb.org/articles.php?doi=10.1257/pol.2.3.154
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Bibliographic Info

Article provided by American Economic Association in its journal American Economic Journal: Economic Policy.

Volume (Year): 2 (2010)
Issue (Month): 3 (August)
Pages: 154-79

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Handle: RePEc:aea:aejpol:v:2:y:2010:i:3:p:154-79

Note: DOI: 10.1257/pol.2.3.154
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References

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Citations

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Cited by:
  1. Merkus, Erik & Allers, Maarten, 2013. "Soft budget constraint but no moral hazard? The Dutch local government bailout puzzle," Research Report 13014-EEF, University of Groningen, Research Institute SOM (Systems, Organisations and Management).
  2. Thushyanthan Baskaran & Zohal Hessami, 2013. "Monetary Integration, Soft Budget Constraints, and the EMU Sovereign Debt Crises," Working Paper Series of the Department of Economics, University of Konstanz 2013-03, Department of Economics, University of Konstanz.
  3. Baskaran, Thushyanthan, 2013. "Do bailouts buy votes? Evidence from a panel of Hessian municipalities," MPRA Paper 48228, University Library of Munich, Germany.
  4. Dietrichson, Jens & Ellegård, Lina Maria, 2012. "Assist or Desist? Conditional Bailouts and Fiscal Discipline in Local Governments," Working Papers 2012:24, Lund University, Department of Economics, revised 28 Oct 2013.
  5. Marko Köthenbürger, 2008. "How Do Local Governments Decide on Public Policy in Fiscal Federalism? Tax vs. Expenditure Optimization," CESifo Working Paper Series 2385, CESifo Group Munich.
  6. Pilar Sorribas-Navarro, 2006. "(When) Are Intergovernmental Transfers Used to Bail Out Regional Governments? Evidence from Spain 1986-2001," Working Papers 2006/7, Institut d'Economia de Barcelona (IEB).
  7. Bordignon, Massimo & Turati, Gilberto, 2009. "Bailing out expectations and public health expenditure," Journal of Health Economics, Elsevier, vol. 28(2), pages 305-321, March.
  8. Fabio Padovano, 2011. "Causes and Consequences of Bailing out Expectations of Subcentral Governments: Theory and Evidence from the Italian Regions," Economics Working Paper Archive (University of Rennes 1 & University of Caen) 201128, Center for Research in Economics and Management (CREM), University of Rennes 1, University of Caen and CNRS.
  9. Arnt Hopland, 2013. "Central government control and fiscal adjustment: Norwegian evidence," Economics of Governance, Springer, vol. 14(2), pages 185-203, May.
  10. Persson, Lovisa, 2013. "Consumption smoothing in a balanced budget regim," Working Paper Series 2013:19, Uppsala University, Department of Economics.
  11. Foremny, Dirk, 2011. "Vertical aspects of sub-national deficits: the impact of fiscal rules and tax autonomy in European countries," MPRA Paper 32998, University Library of Munich, Germany.
  12. Persson, Lovisa, 2013. "Consumption smoothing in a balanced budget regime," Working Paper Series, Center for Fiscal Studies 2013:12, Uppsala University, Department of Economics.
  13. Rosella Levaggi & Francesco Menoncin, 2013. "Soft budget constraints in health care: evidence from Italy," The European Journal of Health Economics, Springer, vol. 14(5), pages 725-737, October.
  14. Sorribas-Navarro, Pilar, 2011. "Bailouts in a fiscal federal system: Evidence from Spain," European Journal of Political Economy, Elsevier, vol. 27(1), pages 154-170, March.
  15. Jean-Michel Josselin & Fabio Padovano & Yvon Rocaboy, 2013. "Grant legislation vs. political factors as determinants of soft budget spending behaviors. Comparison between Italian and French regions," European Journal of Comparative Economics, Cattaneo University (LIUC), vol. 10(3), pages 317-354, December.

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