Advanced Search
MyIDEAS: Login to save this article or follow this journal

Dynamic Commitment and the Soft Budget Constraint: An Empirical Test

Contents:

Author Info

  • 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)

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.aeaweb.org/articles.php?doi=10.1257/pol.2.3.154
Download Restriction: no

File URL: http://www.aeaweb.org/aej/pol/data/2009-0009_data.zip
Download Restriction: Access to full text is restricted to AEA members and institutional subscribers.

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

as in new window
Handle: RePEc:aea:aejpol:v:2:y:2010:i:3:p:154-79

Note: DOI: 10.1257/pol.2.3.154
Contact details of provider:
Email:
Web page: https://www.aeaweb.org/aej-policy
More information through EDIRC

Order Information:
Web: https://www.aeaweb.org/subscribe.html

Related research

Keywords:

Find related papers by JEL classification:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Murphy, Kevin M & Topel, Robert H, 2002. "Estimation and Inference in Two-Step Econometric Models," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 20(1), pages 88-97, January.
  2. Besley, Timothy J. & Case, Anne, 2002. "Political Institutions and Policy Choices: Evidence from the United States," CEPR Discussion Papers, C.E.P.R. Discussion Papers 3498, C.E.P.R. Discussion Papers.
  3. Marianne Bertrand & Esther Duflo & Sendhil Mullainathan, 2004. "How Much Should We Trust Differences-in-Differences Estimates?," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 119(1), pages 249-275, February.
  4. Pagan, Adrian, 1986. "Two Stage and Related Estimators and Their Applications," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 53(4), pages 517-38, August.
  5. Maurice Obstfeld & Robert E. Cumby & John Huizinga, 1983. "Two-Step Two-Stage Least Squares Estimation in Models with Rational Expectations," NBER Technical Working Papers 0011, National Bureau of Economic Research, Inc.
  6. Joseph G. Altonji & Todd E. Elder & Christopher R. Taber, 2000. "Selection on Observed and Unobserved Variables: Assessing the Effectiveness of Catholic Schools," NBER Working Papers 7831, National Bureau of Economic Research, Inc.
  7. Simeon Djankov & Peter Murrell, 2002. "Enterprise Restructuring in Transition: A Quantitative Survey," Journal of Economic Literature, American Economic Association, vol. 40(3), pages 739-792, September.
  8. Per Pettersson-Lidbom, 2008. "Do Parties Matter for Economic Outcomes? A Regression-Discontinuity Approach," Journal of the European Economic Association, MIT Press, MIT Press, vol. 6(5), pages 1037-1056, 09.
  9. McCallum, Bennett T, 1976. "Rational Expectations and the Estimation of Econometric Models: AnAlternative Procedure," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 17(2), pages 484-90, June.
  10. Avinash Dixit & John Londregan, 1998. "Ideology, Tactics, And Efficiency In Redistributive Politics," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 113(2), pages 497-529, May.
  11. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 85(3), pages 473-91, June.
  12. Lindbeck, Assar & Weibull, Jorgen W., 1993. "A model of political equilibrium in a representative democracy," Journal of Public Economics, Elsevier, vol. 51(2), pages 195-209, June.
  13. Abadie, Alberto, 2003. "Semiparametric instrumental variable estimation of treatment response models," Journal of Econometrics, Elsevier, Elsevier, vol. 113(2), pages 231-263, April.
  14. Joseph G. Altonji & Todd E. Elder & Christopher R. Taber, 2005. "An Evaluation of Instrumental Variable Strategies for Estimating the Effects of Catholic Schooling," Journal of Human Resources, University of Wisconsin Press, vol. 40(4), pages 791-821.
  15. Per Pettersson-Lidbom, 2001. "An Empirical Investigation of the Strategic Use of Debt," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 109(3), pages 570-583, June.
  16. McCallum, Bennett T, 1976. "Rational Expectations and the Natural Rate Hypothesis: Some Consistent Estimates," Econometrica, Econometric Society, Econometric Society, vol. 44(1), pages 43-52, January.
  17. Nickell, Stephen J, 1981. "Biases in Dynamic Models with Fixed Effects," Econometrica, Econometric Society, Econometric Society, vol. 49(6), pages 1417-26, November.
  18. Maskin, Eric & Xu, Cheng-Gang, 2001. "Soft Budget Constraint Theories: From Centralization to the Market," CEPR Discussion Papers, C.E.P.R. Discussion Papers 2715, C.E.P.R. Discussion Papers.
  19. Pagan, Adrian, 1984. "Econometric Issues in the Analysis of Regressions with Generated Regressors," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 25(1), pages 221-47, February.
  20. Marcelo J. Moreira, 2003. "A Conditional Likelihood Ratio Test for Structural Models," Econometrica, Econometric Society, Econometric Society, vol. 71(4), pages 1027-1048, 07.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Baskaran, Thushyanthan, 2013. "Do bailouts buy votes? Evidence from a panel of Hessian municipalities," MPRA Paper 48228, University Library of Munich, Germany.
  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. Dietrichson, Jens & Ellegård, Lina Maria, 2012. "Assist or Desist? Conditional Bailouts and Fiscal Discipline in Local Governments," Working Papers, Lund University, Department of Economics 2012:24, Lund University, Department of Economics, revised 28 Oct 2013.
  4. 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.
  5. Kornai, János, 2014. "Bevezetés A puha költségvetési korlát című kötethez
    [Introduction to the author s volume entitled Soft Budget Constraint]
    ," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(7), pages 845-897.
  6. 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.
  7. 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.
  8. Koethenbuerger, Marko, 2011. "How do local governments decide on public policy in fiscal federalism? Tax vs. expenditure optimization," Journal of Public Economics, Elsevier, vol. 95(11), pages 1516-1522.
  9. Bordignon, Massimo & Turati, Gilberto, 2009. "Bailing out expectations and public health expenditure," Journal of Health Economics, Elsevier, vol. 28(2), pages 305-321, March.
  10. 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), Center for Research in Economics and Management (CREM), University of Rennes 1, University of Caen and CNRS 201128, Center for Research in Economics and Management (CREM), University of Rennes 1, University of Caen and CNRS.
  11. Rosella Levaggi & Francesco Menoncin, 2013. "Soft budget constraints in health care: evidence from Italy," The European Journal of Health Economics, Springer, Springer, vol. 14(5), pages 725-737, October.
  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. 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).
  14. Arnt Hopland, 2013. "Central government control and fiscal adjustment: Norwegian evidence," Economics of Governance, Springer, Springer, vol. 14(2), pages 185-203, May.
  15. 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).
  16. Baskaran, Thushyanthan, 2014. "Bailouts and austerity," Center for European, Governance and Economic Development Research Discussion Papers 212, University of Goettingen, Department of Economics.
  17. Baskaran, Thushyanthan, 2014. "The political economy of special needs transfers: Evidence from Bavarian municipalities, 1993-2011," Center for European, Governance and Economic Development Research Discussion Papers 211, University of Goettingen, Department of Economics.
  18. Persson, Lovisa, 2013. "Consumption smoothing in a balanced budget regim," Working Paper Series, Uppsala University, Department of Economics 2013:19, Uppsala University, Department of Economics.

Lists

This item is featured on the following reading lists or Wikipedia pages:
  1. Dynamic Commitment and the Soft Budget Constraint: An Empirical Test (AEJ:EP 2010) in ReplicationWiki

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:aea:aejpol:v:2:y:2010:i:3:p:154-79. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Jane Voros) or (Michael P. Albert).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.