Size, Spillovers and Soft Budget Constraints
AbstractThere is much evidence against the so-called "too big to fail" hypothesis in the case of bailouts to subnational governments. We look at a model where districts of different size provide local public goods with positive spillovers. Matching grants of a central government can induce so-cially-efficient provision, but districts can still exploit the intervening central government by induc-ing direct financing. We show that the ability and willingness of a district to induce a bailout and district size are negatively correlated. We also discuss the effect economies of scale in local public goods provision has on the bailout policies and argue that these policies can be subgame perfect equilibrium strategies.
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Bibliographic InfoPaper provided by Max Planck Institute for Research on Collective Goods in its series Working Paper Series of the Max Planck Institute for Research on Collective Goods with number 2008_17.
Length: 37 pages
Date of creation: Apr 2008
Date of revision:
bailouts; soft-budget constraints; district size; spillovers;
Other versions of this item:
- H4 - Public Economics - - Publicly Provided Goods
- H7 - Public Economics - - State and Local Government; Intergovernmental Relations
- R1 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-05-17 (All new papers)
- NEP-CDM-2008-05-17 (Collective Decision-Making)
- NEP-URE-2008-05-17 (Urban & Real Estate Economics)
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