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Subnational borrowing and bailouts: when the federal government looks at the votes (diferently) and its borrowing matters

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  • Diego Martínez-López

Abstract

Sometimes it is dificult to find a rationale for episodes of bailouts in which the political motivations of the federal government are not clear cut. In other cases, the soft budget constraint of subnational governments (SNGs) seems to be based on unlimited federal resources. This paper aims to shed some light on both issues taking as a reference the workhorse model developed by Goodspeed (2002). The principal change in its basic assumptions lies in allowing the federal government to borrow to finance its grants to SNGs. The results indicate that the way in which the federal government translates voters preferences into electoral probabilities is crucial to determine grants. Moreover, the SNGs do not borrow excessively. When the model is extended to consider risk Premium spreads in the SNGs debt and the option of transferring part of their borrowing to the upper level, the main outcomes remain.

Suggested Citation

  • Diego Martínez-López, 2021. "Subnational borrowing and bailouts: when the federal government looks at the votes (diferently) and its borrowing matters," Working Papers. Collection A: Public economics, governance and decentralization 2101, Universidade de Vigo, GEN - Governance and Economics research Network.
    • Handle: RePEc:gov:wpaper:2101
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    File URL: http://infogen.webs.uvigo.es/WP/WP2101.pdf
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    References listed on IDEAS

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    Cited by:

    1. Fernando González & Diego Martínez-López, 2021. "El diseño de reglas fiscales en gobiernos subcentrales. El caso de España," Policy Papers 2021-01, FEDEA.
    2. Carmen Marín-González & Diego Martínez-López, 2024. "Fiscal stabilisation, debt sustainability and public spending in subnational governments. The case of the Spanish regions," Studies on the Spanish Economy eee2024-02, FEDEA.

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    More about this item

    Keywords

    bailout; borrowing; federal government; political economy; intertemporal consistency.;
    All these keywords.

    JEL classification:

    • H72 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Budget and Expenditures
    • H74 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Borrowing
    • H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism

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