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Debt Bailouts and Constitutions

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  • Kohlscheen, Emanuel

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.

Suggested Citation

  • Kohlscheen, Emanuel, 2006. "Debt Bailouts and Constitutions," Economic Research Papers 269860, University of Warwick - Department of Economics.
    • Handle: RePEc:ags:uwarer:269860
    DOI: 10.22004/ag.econ.269860
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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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    More about this item

    Keywords

    Financial Economics; Political Economy;

    JEL classification:

    • H70 - Public Economics - - State and Local Government; Intergovernmental Relations - - - General

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