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(When) Are Intergovernmental Transfers Used to Bail Out Regional Governments? Evidence from Spain 1986-2001

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  • Pilar Sorribas-Navarro

    ()
    (Institut d'Economia de Barcelona (IEB); Universitat de Barcelona (UB))

Abstract

This paper analyses the main determinants of a central government’s decision to use grants to bail out regional governments (i.e., the determinants of additional grants assigned by a central government to regions due to an increase in their issue of debt). The estimated grant equation is derived from a model of a federation, based on Goodspeed (2002), where regions are Stakelberg leaders and the central government’s objective is to maximize a weighted sum of the welfare of the representative consumers from all the regions. The specified equation is estimated separately with a panel data set of discretionary and non-discretionary grants for 15 Spanish regions during the period 1986-2001, using the within and the GMM estimators (Arellano and Bond, 1991), respectively. The results show that the Spanish central government uses grants to partially bailout regions. Such fiscal rescue operations are more intense when: i) the region is responsible for providing health care; ii) debt limits exist (and they have not been properly designed); iii) regional voters are relatively indifferent between the incumbent and the challenger (i.e., there is a high proportion of swing voters).

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Bibliographic Info

Paper provided by Institut d'Economia de Barcelona (IEB) in its series Working Papers with number 2006/7.

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Length: 42 pages
Date of creation: 2006
Date of revision:
Handle: RePEc:ieb:wpaper:2008/9/doc2006-7

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Keywords: Intergovernmental grants; bailouts; political economy.;

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References

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  1. David E. Wildasin, 2001. "Externalities and Bailouts: Hard and Soft Budget Constraints in Intergovernmental Fiscal Relations," Public Economics, EconWPA 0112002, EconWPA.
  2. Milesi-Ferretti, Gian Maria, 2001. "Good, Bad or Ugly? On the Effects of Fiscal Rules with Creative Accounting," CEPR Discussion Papers, C.E.P.R. Discussion Papers 2663, C.E.P.R. Discussion Papers.
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  6. Anne Case, 1997. "Election Goals and Income Redistribution: Recent Evidence From Albania," Working Papers, Princeton University, Woodrow Wilson School of Public and International Affairs, Research Program in Development Studies. 227, Princeton University, Woodrow Wilson School of Public and International Affairs, Research Program in Development Studies..
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  8. Jürgen Von Hagen & Massimo Bordignon & Bhajan S. Grewal & Per Peterson & Helmut Seitz & Matz Dahlberg, 2000. "Subnational Government Bailouts in OECD Countries: Four Case Studies," Research Department Publications, Inter-American Development Bank, Research Department 3100, Inter-American Development Bank, Research Department.
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  17. Martin Besfamille & Ben Lockwood, 2008. "Bailouts In Federations: Is A Hard Budget Constraint Always Best?," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 49(2), pages 577-593, 05.
  18. Jonathan A. Rodden & Gunnar S. Eskeland (ed.), 2003. "Fiscal Decentralization and the Challenge of Hard Budget Constraints," MIT Press Books, The MIT Press, The MIT Press, edition 1, volume 1, number 0262182297, December.
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  20. Fredrik Carlsen, 1998. "Central Regulation of Local Authorities," Public Finance Review, , , vol. 26(4), pages 304-326, July.
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