Debt Bailouts and Constitutions
AbstractA demand based theory of sub-national debt bailouts is presented. It is shown that revenue sharing (RS) arrangements alter the demand for bailouts among politicians with regional constituencies as a bailout usually implies a shift of taxation to the federal tier. Automatic RS may lead to the formation of pro-bailout coalitions formed by indebted states and states that are net recipients of the RS arrangement. Also, RS can act as a commitment device for compensating payments among state representatives, making a bailout politically rational. The model shows that the state debt bailouts approved by the Brazilian Senate prior to the enactment of the Fiscal Responsibility Act were fully consistent with politicians that maximize the proceeds accruing to their constituencies.
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Bibliographic InfoPaper provided by University of Warwick, Department of Economics in its series The Warwick Economics Research Paper Series (TWERPS) with number 862.
Length: 35 pages
Date of creation: 2008
Date of revision:
bailout ; commitment ; Constitutions ; debt ; federalism revenue sharing; soft budget constraints;
Other versions of this item:
- H70 - Public Economics - - State and Local Government; Intergovernmental Relations - - - General
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