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Subnational fiscal behavior under the expectation of federal bailouts

Author

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  • Ernesto Crivelli

Abstract

This paper analyzes how subnational governments allocate own resources between current spending and infrastructure investment and decide on borrowing under the expectation of federal bailouts. It is assumed that states' borrowing possibilities increase with the expectation of such bailouts because the financial system is willing to fund a higher amount of public investment projects. As a result, state governments engage in an opportunistic behavior: they allocate a higher (lower) than optimal amount of own resources to current spending (infrastructure investment) and over-borrow.

Suggested Citation

  • Ernesto Crivelli, 2011. "Subnational fiscal behavior under the expectation of federal bailouts," Journal of Economic Policy Reform, Taylor & Francis Journals, vol. 14(1), pages 41-57.
  • Handle: RePEc:taf:jpolrf:v:14:y:2011:i:1:p:41-57
    DOI: 10.1080/17487870.2011.543760
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    References listed on IDEAS

    as
    1. 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.
    2. Hauptmeier, Sebastian, 2007. "Intergovernmental grants and public input provision: theory and evidence from Germany," ZEW Discussion Papers 07-006, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
    3. Seitz, Helmut, 1999. "Subnational government bailouts in Germany," ZEI Working Papers B 20-1999, University of Bonn, ZEI - Center for European Integration Studies.
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