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Externalities and Bailouts: Hard and Soft Budget Constraints in Intergovernmental Fiscal Relations

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Author Info
David E. Wildasin (University of Kentucky)

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Abstract

Central government matching grants can, in principle, induce socially- efficient provision of local public goods that produce spillover benefits. Local underprovision of public goods may however elicit direct central-government provision and finance (a ``bailout") that makes local residents better off than under grant-subsidized local provision; local underprovision that induces bailouts reveals the local budget constraint to be ``soft." Simulations suggest that the ability of a locality to extract a welfare-improving bailout depends positively on its size: budget constraints are more likely to be ``hard" for small localities.

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Paper provided by EconWPA in its series Public Economics with number 0112002.

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Date of creation: 10 Dec 2001
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Handle: RePEc:wpa:wuwppe:0112002

Note: Type of Document - ; prepared on TeX; figures: request from author
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Keywords: fiscal federalism intergovernmental transfers;

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Find related papers by JEL classification:
D6 - Microeconomics - - Welfare Economics
D7 - Microeconomics - - Analysis of Collective Decision-Making
H - Public Economics

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Qian, Yingyi, 1994. "A Theory of Shortage in Socialist Economies Based on the "Soft Budget Constraint."," American Economic Review, American Economic Association, vol. 84(1), pages 145-56, March. [Downloadable!] (restricted)
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  4. Kornai, Janos, 1986. "The Soft Budget Constraint," Kyklos, Blackwell Publishing, vol. 39(1), pages 3-30.
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    Other versions:
    • Eaton, Jonathan & Gersovitz, Mark & Stiglitz, Joseph E., 1986. "The pure theory of country risk," European Economic Review, Elsevier, vol. 30(3), pages 481-513, June. [Downloadable!] (restricted)
    • Jonathan Eaton & Mark Gersovitz & Joseph E. Stiglitz, 1991. "The Pure Theory of Country Risk," NBER Chapters, in: International Volatility and Economic Growth: The First Ten Years of The International Seminar on Macroeconomics, pages 391-435 National Bureau of Economic Research, Inc. [Downloadable!]
  6. McKinnon, Ronald I., 1995. "Intergovernmental competition in Europe with and without a common currency," Journal of Policy Modeling, Elsevier, vol. 17(5), pages 463-478, October. [Downloadable!] (restricted)
  7. Inman, Robert P, 1995. "How to Have a Fiscal Crisis: Lessons from Philadelphia," American Economic Review, American Economic Association, vol. 85(2), pages 378-83, May. [Downloadable!] (restricted)
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  9. Cremer, Jacques, 1995. "Arm's Length Relationships," The Quarterly Journal of Economics, MIT Press, vol. 110(2), pages 275-95, May. [Downloadable!] (restricted)
  10. Dewatripont, M & Maskin, E, 1995. "Credit and Efficiency in Centralized and Decentralized Economies," Review of Economic Studies, Blackwell Publishing, vol. 62(4), pages 541-55, October. [Downloadable!] (restricted)
  11. Wildasin, David E., 1998. "Fiscal aspect of evolving federations : issues for policy and research," Policy Research Working Paper Series 1884, The World Bank. [Downloadable!]
  12. Jonathan Eaton & Mark Gersovitz, 1987. "Country Risk and the Organization of International Capital Transfer," NBER Working Papers 2204, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  13. Prud'homme, Remy, 1995. "The Dangers of Decentralization," World Bank Research Observer, Oxford University Press, vol. 10(2), pages 201-20, August.
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