We analyze a model where the federal government provides risk sharing arrangements to municipalities investing in a local public good. The risk sharing arrangements are an income equalization system and a system allowing for a soft budget constraint, i.e., a bailout. Our main result is that a bailout system in combination with income equalization can be a more efficient risk sharing arrangement than an income equalization system only. Thus, the introduction of a bailout system is welfare improving.
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Paper provided by Uppsala University, Department of Economics in its series Working Paper Series with number
2006:5.
Length: 22 pages Date of creation: 26 Jan 2006 Date of revision: Handle: RePEc:hhs:uunewp:2006_005
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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
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