Fiscal decentralization, regional inequality and bail-outs: Lessons from Brazil's debt crisis
This paper develops a simple two-period model of public good provision within a federation. A national public good is provided to both states by the federal government, while a local public good is supplied by each state government. The federal government levies a proportional income tax, and in each period the state governments receive a share of the revenues collected equal to the amount needed to finance the first best provision of the local public good. In the first period the local governments can also use borrowing to finance the provision of the public good, but any debt contracted must be repaid in the second period. We show that when the states face a hard budget constraint, they do not find it optimal to increase the provision of the local public good above the first best level guaranteed by the federal grant. However, if the federal government cannot credibly commit not to bail-out the states, then the local governments may find it optimal to borrow in order to increase the provision of the public good above the first best in the first period. Furthermore, we show that the commitment problem is more likely to arise vis-á-vis states whose default results in a negative externality on the federation. Hence, those states are more likely to carry on budget deficits and benefit from a federal bail-out.
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
References listed on IDEAS
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.:
- Mathias Dewatripont & Eric Maskin, 2004.
"Credit and efficiency in centralized and decentralized economies,"
ULB Institutional Repository
2013/9605, ULB -- Universite Libre de Bruxelles.
- Mathias Dewatripont & Eric Maskin, 1995. "Credit and efficiency in centralized and decentralized economies," ULB Institutional Repository 2013/9603, ULB -- Universite Libre de Bruxelles.
- Alberto Alesina & Guido Tabellini, 1988.
"External Debt, Capital Flight and Political Risk,"
UCLA Economics Working Papers
538, UCLA Department of Economics.
- Tabellini, Guido & Alesina, Alberto, 1989. "External Debt, Capital Flight and Political Risk," Scholarly Articles 4553019, Harvard University Department of Economics.
- Alberto Alesina & Guido Tabellini, 1988. "External Debt, Capital Flight and Political Risk," NBER Working Papers 2610, National Bureau of Economic Research, Inc.
- Alesina, Alberto F & Tabellini, Guido, 1988. "External Debt, Capital Flight and Political Risk," CEPR Discussion Papers 253, C.E.P.R. Discussion Papers.
- Milanovic, Branko, 2005.
"Half a world : regional inequality in five great federations,"
Policy Research Working Paper Series
3699, The World Bank.
- Branko Milanovic, 2004. "Half a World: Regional inequality in five great federations," Urban/Regional 0404002, EconWPA.
- M. Dewatripont & E. Maskin, 1995. "Credit and Efficiency in Centralized and Decentralized Economies," Review of Economic Studies, Oxford University Press, vol. 62(4), pages 541-555.
- Carlos R. Azzoni, 2001. "Economic growth and regional income inequality in Brazil," The Annals of Regional Science, Springer;Western Regional Science Association, vol. 35(1), pages 133-152.
When requesting a correction, please mention this item's handle: RePEc:eee:quaeco:v:48:y:2008:i:2:p:333-344. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Shamier, Wendy)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.