Fausto Hernandez Trillo () (Centro de Investigacion y Docencia Economica A.C.) Alberto Diaz Cayeros (Centro de Investigacion para el Desarrollo) Rafael Gamboa Gonzalez (Banco de Mexico)
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This paper identifies and analyzes the determinants and consequences of bailing out states, in particular, those observed in Mexico. This case is important because lessons can be obtained for other LDCs. Bailouts of lower-level governments have not been the object of much research in economics. This work suggests that the explicit generalized bailout carried out by the federal government in Mexico in 1995 created a moral hazard problem. The existing institutional-legal framework is not adequate, because it provides incentives for states to borrow and for banks to lend without evaluating the risk of the project. Likewise, the importance of the state (size) is a major determinant in providing bailout transfers. Also, the more a state government is in fiscal need when the state government is incapable of adjusting its expenditure, the more likely the state is to get an extraordinary transfer during the period of study. On the other hand, political variables are not an important determinant of a bailout, except, perhaps, when there are state elections. We also show that excessive indebtedness of local states may have equity implications as well: bailouts tend to be highly regressive, as the poorer –low indebted- states receive much less in extraordinary resources.
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Volume (Year): 28 (2002) Issue (Month): 3 (Summer) Pages: 365-380 Download reference. The following formats are available: HTML
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Find related papers by JEL classification: H72 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Budget and Expenditures H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism H74 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Borrowing O23 - Economic Development, Technological Change, and Growth - - Development Planning and Policy - - - Fiscal and Monetary Policy in Development
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