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Soft budget constraints and strategic interactions in subnational borrowing: Evidence from the German States, 1975–2005

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  • Baskaran, Thushyanthan

Abstract

Cooperative federations are usually characterized by the existence of bailout guarantees and intergovernmental transfer schemes. This paper explores whether such features of cooperative federations lead to subnational soft budget constraints using panel data from the German States covering the 1975–2005 period. The methodology is based on the premise that subnational governments’ borrowing will exhibit vertical and horizontal strategic interactions if they operate under soft budget constraints. Therefore, a test for strategic interactions in subnational borrowing can be used to infer whether a cooperative federation like Germany is susceptible to soft budget constraints. The results suggest that state borrowing in Germany exhibited horizontal but not vertical interactions during the time-frame of the analysis. This indicates (i) that German States faced soft budget constraints and (ii) that they were more concerned about the likelihood of a bailout than about its volume.

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Bibliographic Info

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

Volume (Year): 71 (2012)
Issue (Month): 1 ()
Pages: 114-127

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Handle: RePEc:eee:juecon:v:71:y:2012:i:1:p:114-127

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

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Keywords: Fiscal federalism; Soft budget constraints; Strategic fiscal interactions;

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Citations

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Cited by:
  1. 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.
  2. Thushyanthan Baskaran & Zohal Hessami, 2011. "A Tale of Five PIIGS: Soft Budget Constraints and the EMU Sovereign Debt Crises," Working Paper Series of the Department of Economics, University of Konstanz, Department of Economics, University of Konstanz 2011-45, Department of Economics, University of Konstanz.
  3. Mario Jametti & Marcelin Joanis, 2014. "Elections and de facto Expenditure Decentralization in Canada," CIRANO Working Papers, CIRANO 2014s-28, CIRANO.
  4. 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), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(7), pages 845-897.
  5. 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, University of Goettingen, Department of Economics 211, University of Goettingen, Department of Economics.
  6. 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, Department of Economics, University of Konstanz 2013-03, Department of Economics, University of Konstanz.
  7. Thushyanthan Baskaran, 2013. "Do bailouts buy votes? Evidence from a panel of Hessian municipalities," Economics of Governance, Springer, Springer, vol. 14(3), pages 257-278, August.
  8. Jens Dietrichson & Lina Maria Ellegård, 2013. "Assist or desist? Conditional bailouts and fiscal discipline in local governments," ERSA conference papers, European Regional Science Association ersa13p598, European Regional Science Association.
  9. Karsten Mause & Friedrich Groeteke, 2012. "New constitutional “debt brakes” for Euroland? A question of institutional complementarity," Constitutional Political Economy, Springer, Springer, vol. 23(4), pages 279-301, December.

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