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

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  • David E. Wildasin

    (University of Kentucky)

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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Bibliographic Info

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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Web page: http://128.118.178.162

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Keywords: fiscal federalism intergovernmental transfers;

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