Externalities and Bailouts: Hard and Soft Budget Constraints in Intergovernmental Fiscal Relations
AbstractCentral 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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Date of creation: 10 Dec 2001
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fiscal federalism intergovernmental transfers;
Other versions of this item:
- Wildasin, David E., 1997. "Externalities and bailouts : hard and soft budget constraints in intergovernmental fiscal relations," Policy Research Working Paper Series 1843, The World Bank.
- D6 - Microeconomics - - Welfare Economics
- D7 - Microeconomics - - Analysis of Collective Decision-Making
- H - Public Economics
This paper has been announced in the following NEP Reports:
- NEP-PBE-2001-12-19 (Public Economics)
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