Federalism and the Soft Budget Constraint
The government's incentives to bail out inefficient projects are determined by the trade-off between political benefits and economic costs, the latter depending on the decentralization of government. Two effects of federalism are derived: first, fiscal competition among local governments under factor mobility increases the opportunity costs of bailout and, thus, serves as a commitment device (the 'competition effect'); second, monetary centralization, together with fiscal decentralization, induces a conflict of interests and, thus, may harden budget constraints and reduce inflation (the 'checks and balance effect'). The authors' analysis is used to interpret China's recent experience of transition to a market economy. Copyright 1998 by American Economic Association.
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Volume (Year): 88 (1998)
Issue (Month): 5 (December)
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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.:
- 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.
- David E. Wildasin, 2001. "Externalities and Bailouts: Hard and Soft Budget Constraints in Intergovernmental Fiscal Relations," Public Economics 0112002, EconWPA.
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