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Soft Budget Constraints as a Risk Sharing Arrangement in an Economic Federation

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Author Info

  • Lindahl, Erica

    () (Department of Economics)

  • Westermark, Andreas

    () (Department of Economics)

Abstract

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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File URL: http://www.nek.uu.se/pdf/wp2006_5.pdf
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Bibliographic Info

Paper provided by Uppsala University, Department of Economics in its series Working Paper Series with number 2006:5.

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Length: 22 pages
Date of creation: 26 Jan 2006
Date of revision:
Handle: RePEc:hhs:uunewp:2006_005

Contact details of provider:
Postal: Department of Economics, Uppsala University, P. O. Box 513, SE-751 20 Uppsala, Sweden
Phone: + 46 18 471 25 00
Fax: + 46 18 471 14 78
Email:
Web page: http://www.nek.uu.se/
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Keywords: Bailout; Fiscal federalism;

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