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Bailing out expectations and public health expenditure

  • Bordignon, Massimo
  • Turati, Gilberto

We use a "natural experiment", the fiscal adjustment of Italy in the 1990s to meet the Maastricht criteria, to test a simple model of soft budget constraint that closely resembles the intergovernmental relationships in the Italian public health care sector. We show that the link between the ex-ante financing by the Central government and the health expenditure by regions was stronger when regional expectations of future bailing outs were presumably lower. Confirming previous research, we also prove that more fiscally autonomous regions were more financially responsible and that a political "alignment" effect was present, with "friendly" regional governments controlling more expenditure than unfriendly ones. Our results suggest that, at least in Italy, bailing out expectations by regions may be the missing variable emphasised by [Culyer A.J., 1988. Health care expenditures in Canada: Myth and reality. Canadian Tax Papers, 82] for empirical models explaining health expenditure. Our results also raise some worries about the outcome of the current decentralization process in Europe.

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Article provided by Elsevier in its journal Journal of Health Economics.

Volume (Year): 28 (2009)
Issue (Month): 2 (March)
Pages: 305-321

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Handle: RePEc:eee:jhecon:v:28:y:2009:i:2:p:305-321
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  17. Per Pettersson-Lidbom, 2010. "Dynamic Commitment and the Soft Budget Constraint: An Empirical Test," American Economic Journal: Economic Policy, American Economic Association, vol. 2(3), pages 154-79, August.
  18. Massimo Bordignon & Gilberto Turati, 2003. "Bailing Out Expectations and Health Expenditure in Italy," CESifo Working Paper Series 1026, CESifo Group Munich.
  19. von Hagen, Jurgen & Eichengreen, Barry, 1996. "Federalism, Fiscal Restraints, and European Monetary Union," American Economic Review, American Economic Association, vol. 86(2), pages 134-38, May.
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