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Debt Bailouts and Constitutions

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  • Emanuel Kohlscheen

    (Economics Department, University of Warwick.)

Abstract

A 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 Info

Paper provided by University of Warwick, Department of Economics in its series The Warwick Economics Research Paper Series (TWERPS) with number 862.

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Length: 35 pages
Date of creation: 2008
Date of revision:
Handle: RePEc:wrk:warwec:862

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Keywords: bailout ; commitment ; Constitutions ; debt ; federalism revenue sharing; soft budget constraints;

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  1. Inman, Robert P. & Rubinfeld, Daniel L., 1996. "Designing tax policy in federalist economies: An overview," Journal of Public Economics, Elsevier, vol. 60(3), pages 307-334, June.
  2. Yingyi Qian & Gerard Roland, . "Federalism and the Soft Budget Constraint," Working Papers 97045, Stanford University, Department of Economics.
  3. Janos Kornai & Eric Maskin & Gerard Roland, 2002. "Understanding the Soft Budget Constraint," Economics Working Papers 0019, Institute for Advanced Study, School of Social Science.
  4. Thomas Courchene, 1999. "Subnational Budgetary and Stabilization Policies in Canada and Australia," NBER Chapters, in: Fiscal Institutions and Fiscal Performance, pages 301-348 National Bureau of Economic Research, Inc.
  5. Seitz, Helmut, 1999. "Subnational government bailouts in Germany," ZEI Working Papers B 20-1999, ZEI - Center for European Integration Studies, University of Bonn.
  6. Persson, Torsten & Tabellini, Guido, 1996. "Federal Fiscal Constitutions: Risk Sharing and Redistribution," Journal of Political Economy, University of Chicago Press, vol. 104(5), pages 979-1009, October.
  7. Mariano Tommasi & Pablo Sanguinetti, 2003. "Intergovernmental Transfers and Fiscal Behavior: Insurance versus Aggregate Discipline," Working Papers 60, Universidad de San Andres, Departamento de Economia, revised Aug 2003.
  8. Persson, Torsten & Tabellini, Guido, 1996. "Federal Fiscal Constitutions: Risk Sharing and Moral Hazard," Econometrica, Econometric Society, vol. 64(3), pages 623-46, May.
  9. Robin W. Boadway & Frank R. Flatters, 1982. "Efficiency and Equalization Payments in a Federal System of Government: A Synthesis and Extension of Recent Results," Canadian Journal of Economics, Canadian Economics Association, vol. 15(4), pages 613-33, November.
  10. Dixit, Avinash & Londregan, John, 1998. "Fiscal federalism and redistributive politics," Journal of Public Economics, Elsevier, vol. 68(2), pages 153-180, May.
  11. Bucovetsky, Sam, 1998. "Federalism, equalization and risk aversion," Journal of Public Economics, Elsevier, vol. 67(3), pages 301-328, March.
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Cited by:
  1. Eichler, Stefan & Hofmann, Michael, 2013. "Sovereign default risk and decentralization: Evidence for emerging markets," European Journal of Political Economy, Elsevier, vol. 32(C), pages 113-134.

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