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Restricted Bailouts and the Commitment Problem in Federations

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  • Karolina Kaiser
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    Abstract

    Standard models of soft budget constraints consider bailouts as pure monetary transfers. However, in practice often additional obligations or restrictions, such as savings goals, are linked to monetary bailouts. This paper analyzes in a model of a federation if such restrictions change eco- nomic outcomes in an soft budget constraint environment and under what circumstances they can increase welfare as compared to pure soft budget and hard budget regimes. We ?nd that restrictions generally harden budget constraints, but not necessarily increase welfare. The evaluation crucially depends on the tax endowment of the central government and on the shape of preferences.

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    File URL: http://www.bgpe.de/texte/DP/062_kaiser.pdf
    File Function: First version, 2008
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    Bibliographic Info

    Paper provided by Bavarian Graduate Program in Economics (BGPE) in its series Working Papers with number 062.

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    Length: 34 pages
    Date of creation: Jun 2008
    Date of revision:
    Handle: RePEc:bav:wpaper:062_kaiser

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    Web page: http://www.bgpe.de/
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    Keywords: bailouts; soft budget constraints; federalism;

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