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Overlapping soft budget constraints

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  • Breuillé, Marie-Laure
  • Vigneault, Marianne

Abstract

Our paper identifies a potential problem with decentralization at a time when its virtues are widely extolled. We show that responsibility for equalization at multi-levels within a decentralized federation creates an overlapping equalization policy that can worsen fiscal discipline. Contrary to Qian and Roland (1998), we also show in our set-up that fiscal competition among regional rescuers does not act as a commitment device to harden the local budget constraint.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Urban Economics.

Volume (Year): 67 (2010)
Issue (Month): 3 (May)
Pages: 259-269

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Handle: RePEc:eee:juecon:v:67:y:2010:i:3:p:259-269

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Web page: http://www.elsevier.com/locate/inca/622905

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Keywords: Soft budget constraint Fiscal federalism Capital tax competition;

References

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  1. J. Kornai & E. Maskin & G. Roland., 2004. "Understanding the Soft Budget Constraint," VOPROSY ECONOMIKI, N.P. Redaktsiya zhurnala "Voprosy Economiki", N.P. Redaktsiya zhurnala "Voprosy Economiki", vol. 11.
  2. Qian, Yingyi & Roland, Gerard, 1998. "Federalism and the Soft Budget Constraint," American Economic Review, American Economic Association, American Economic Association, vol. 88(5), pages 1143-62, December.
  3. Charles M. Tiebout, 1956. "A Pure Theory of Local Expenditures," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 64, pages 416.
  4. Akai, Nobuo & Sato, Motohiro, 2008. "Too big or too small? A synthetic view of the commitment problem of interregional transfers," Journal of Urban Economics, Elsevier, Elsevier, vol. 64(3), pages 551-559, November.
  5. Marko Koethenbuerger, 2003. "Tax Competition in a Fiscal Union with Decentralized Leadership," CESifo Working Paper Series, CESifo Group Munich 943, CESifo Group Munich.
  6. David E. Wildasin & Thiess Buettner, 2005. "The Dynamics of Municipal Fiscal Adjustment," Working Papers, University of Kentucky, Institute for Federalism and Intergovernmental Relations 2005-03, University of Kentucky, Institute for Federalism and Intergovernmental Relations.
  7. Martin Besfamille & Ben Lockwood, 2008. "Bailouts In Federations: Is A Hard Budget Constraint Always Best?," 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. 49(2), pages 577-593, 05.
  8. Seitz, Helmut, 1999. "Subnational government bailouts in Germany," ZEI Working Papers, ZEI - Center for European Integration Studies, University of Bonn B 20-1999, ZEI - Center for European Integration Studies, University of Bonn.
  9. Wildasin, David E., 1997. "Externalities and bailouts : hard and soft budget constraints in intergovernmental fiscal relations," Policy Research Working Paper Series, The World Bank 1843, The World Bank.
  10. Isabelle Joumard & Per Mathis Kongsrud, 2003. "Fiscal Relations across Government Levels," OECD Economic Studies, OECD Publishing, OECD Publishing, vol. 2003(1), pages 155-229.
  11. Weingast, Barry R., 2009. "Second generation fiscal federalism: The implications of fiscal incentives," Journal of Urban Economics, Elsevier, Elsevier, vol. 65(3), pages 279-293, May.
  12. Timothy Goodspeed, 2002. "Bailouts in a Federation," International Tax and Public Finance, Springer, Springer, vol. 9(4), pages 409-421, August.
  13. Chirinko, Robert S. & Fazzari, Steven M. & Meyer, Andrew P., 1999. "How responsive is business capital formation to its user cost?: An exploration with micro data," Journal of Public Economics, Elsevier, Elsevier, vol. 74(1), pages 53-80, October.
  14. Breuille, Marie-Laure & Madies, Thierry & Taugourdeau, Emmanuelle, 2006. "Does tax competition soften regional budget constraint?," Economics Letters, Elsevier, Elsevier, vol. 90(2), pages 230-236, February.
  15. Nobuo Akai & Emilson Silva, 2009. "Interregional redistribution as a cure to the soft budget syndrome in federations," International Tax and Public Finance, Springer, Springer, vol. 16(1), pages 43-58, February.
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Citations

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Cited by:
  1. Mario Jametti & Marcelin Joanis, 2014. "Elections and de facto Expenditure Decentralization in Canada," CESifo Working Paper Series, CESifo Group Munich 4791, CESifo Group Munich.
  2. Baskaran, Thushyanthan, 2011. "Soft budget constraints and strategic interactions in subnational borrowing: Evidence from the German States, 1975-2005," MPRA Paper 32537, University Library of Munich, Germany.
  3. 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.
  4. Baskaran, Thushyanthan, 2013. "Do bailouts buy votes? Evidence from a panel of Hessian municipalities," MPRA Paper 48228, University Library of Munich, Germany.
  5. Marie-Laure Breuillé & Skerdilajda Zanaj, 2010. "Mergers in Fiscal Federalism," CREA Discussion Paper Series, Center for Research in Economic Analysis, University of Luxembourg 10-10, Center for Research in Economic Analysis, University of Luxembourg.
  6. Amélie Lecocq & Marcelin Joanis, 2013. "Au-delà des certitudes : Pouvoir gris, obésité et autres dimensions incertaines de l’impact budgétaire du vieillissement," Cahiers de recherche, Departement d'Economique de la Faculte d'administration à l'Universite de Sherbrooke 13-08, Departement d'Economique de la Faculte d'administration à l'Universite de Sherbrooke.
  7. Boadway, Robin & Song, Zhen & Tremblay, Jean-François, 2013. "Non-cooperative pollution control in an inter-jurisdictional setting," Regional Science and Urban Economics, Elsevier, Elsevier, vol. 43(5), pages 783-796.
  8. Baskaran, Thushyanthan, 2014. "Bailouts and austerity," Center for European, Governance and Economic Development Research Discussion Papers, University of Goettingen, Department of Economics 212, University of Goettingen, Department of Economics.
  9. 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.
  10. Breuillé, Marie-Laure & Madiès, Thierry & Taugourdeau, Emmanuelle, 2010. "Gross versus net equalization scheme in a federation with decentralized leadership," Journal of Urban Economics, Elsevier, Elsevier, vol. 68(2), pages 205-214, September.

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