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Overlapping soft budget constraints

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Author Info

  • 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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File URL: http://www.sciencedirect.com/science/article/B6WMG-4X9TTR2-1/2/e2bdcba37098033f5bcab4b8265ba223
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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

Related research

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", vol. 11.
  2. Marko Koethenbuerger, 2003. "Tax Competition in a Fiscal Union with Decentralized Leadership," CESifo Working Paper Series 943, CESifo Group Munich.
  3. Isabelle Joumard & Per Mathis Kongsrud, 2003. "Fiscal Relations across Government Levels," OECD Economic Studies, OECD Publishing, vol. 2003(1), pages 155-229.
  4. Thiess Buettner & David E. Wildasin, 2003. "The Dynamics of Municipal Fiscal Adjustment," Public Economics 0309007, EconWPA.
  5. Wildasin, David E., 1997. "Externalities and bailouts : hard and soft budget constraints in intergovernmental fiscal relations," Policy Research Working Paper Series 1843, The World Bank.
  6. Seitz, Helmut, 1999. "Subnational government bailouts in Germany," ZEI Working Papers B 20-1999, ZEI - Center for European Integration Studies, University of Bonn.
  7. 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, vol. 74(1), pages 53-80, October.
  8. Nobuo Akai & Emilson Silva, 2009. "Interregional redistribution as a cure to the soft budget syndrome in federations," International Tax and Public Finance, Springer, vol. 16(1), pages 43-58, February.
  9. Qian, Yingyi & Roland, Gerard, 1998. "Federalism and the Soft Budget Constraint," American Economic Review, American Economic Association, vol. 88(5), pages 1143-62, December.
  10. Timothy Goodspeed, 2002. "Bailouts in a Federation," International Tax and Public Finance, Springer, vol. 9(4), pages 409-421, August.
  11. Weingast, Barry R., 2009. "Second generation fiscal federalism: The implications of fiscal incentives," Journal of Urban Economics, Elsevier, vol. 65(3), pages 279-293, May.
  12. Charles M. Tiebout, 1956. "A Pure Theory of Local Expenditures," Journal of Political Economy, University of Chicago Press, vol. 64, pages 416.
  13. Breuille, Marie-Laure & Madies, Thierry & Taugourdeau, Emmanuelle, 2006. "Does tax competition soften regional budget constraint?," Economics Letters, Elsevier, vol. 90(2), pages 230-236, February.
  14. 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, vol. 49(2), pages 577-593, 05.
  15. 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, vol. 64(3), pages 551-559, November.
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Citations

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Cited by:
  1. Marie-Laure Breuillé & Skerdilajda Zanaj, 2010. "Mergers in Fiscal Federalism," INRA UMR CESAER Working Papers 2010/6, INRA UMR CESAER, Centre d'’Economie et Sociologie appliquées à l'’Agriculture et aux Espaces Ruraux.
  2. Mario Jametti & Marcelin Joanis, 2014. "Elections and de facto Expenditure Decentralization in Canada," IdEP Economic Papers 1404, USI Università della Svizzera italiana.
  3. Boadway, Robin & Song, Zhen & Tremblay, Jean-François, 2013. "Non-cooperative pollution control in an inter-jurisdictional setting," Regional Science and Urban Economics, Elsevier, vol. 43(5), pages 783-796.
  4. Baskaran, Thushyanthan, 2012. "Soft budget constraints and strategic interactions in subnational borrowing: Evidence from the German States, 1975–2005," Journal of Urban Economics, Elsevier, vol. 71(1), pages 114-127.
  5. 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 13-08, Departement d'Economique de la Faculte d'administration à l'Universite de Sherbrooke.
  6. Thushyanthan Baskaran, 2013. "Do bailouts buy votes? Evidence from a panel of Hessian municipalities," Economics of Governance, Springer, vol. 14(3), pages 257-278, August.
  7. 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.
  8. Breuillé, Marie-Laure & Madiès, Thierry & Taugourdeau, Emmanuelle, 2010. "Gross versus net equalization scheme in a federation with decentralized leadership," Journal of Urban Economics, Elsevier, vol. 68(2), pages 205-214, September.
  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.

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