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

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

Author Info

Lindahl, Erica () (Department of Economics)
Westermark, Andreas () (Department of Economics)

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Andreas Westermark

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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Publisher 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

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Postal: Department of Economics, Uppsala University, P. O. Box 513, SE-751 20 Uppsala, Sweden
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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

This paper has been announced in the following NEP Reports:

NEP-ALL-2006-09-11 (All new papers)
NEP-PBE-2006-09-11 (Public Economics)
NEP-POL-2006-09-11 (Positive Political Economics)
NEP-URE-2006-09-11 (Urban & Real Estate Economics)

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