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Restricted Bailouts and the Commitment Problem in Federations

  • Karolina Kaiser
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    Standard models of soft budget constraints consider bailouts as pure monetary transfers. However, in practice often additional obligations or restrictions, such as savings goals, are linked to monetary bailouts. This paper analyzes in a model of a federation if such restrictions change eco- nomic outcomes in an soft budget constraint environment and under what circumstances they can increase welfare as compared to pure soft budget and hard budget regimes. We ?nd that restrictions generally harden budget constraints, but not necessarily increase welfare. The evaluation crucially depends on the tax endowment of the central government and on the shape of preferences.

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    File URL: http://www.bgpe.de/texte/DP/062_kaiser.pdf
    File Function: First version, 2008
    Download Restriction: no

    Paper provided by Bavarian Graduate Program in Economics (BGPE) in its series Working Papers with number 062.

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    Length: 34 pages
    Date of creation: Jun 2008
    Handle: RePEc:bav:wpaper:062_kaiser
    Contact details of provider: Web page: http://www.bgpe.de/

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    1. Timothy Goodspeed, 2002. "Bailouts in a Federation," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 9(4), pages 409-421, August.
    2. Ernesto Crivelli & Klaas Staal, 2008. "Size, Spillovers and Soft Budget Constraints," Working Paper Series of the Max Planck Institute for Research on Collective Goods 2008_17, Max Planck Institute for Research on Collective Goods.
    3. Mathias Dewatripont & Eric Maskin, 2004. "Credit and efficiency in centralized and decentralized economies," ULB Institutional Repository 2013/9605, ULB -- Universite Libre de Bruxelles.
    4. Kothenburger, Marko, 2007. "Ex-post redistribution in a federation: Implications for corrective policy," Journal of Public Economics, Elsevier, vol. 91(3-4), pages 481-496, April.
    5. Marie-Laure Breuillé & Thierry Madiès & Emmanuelle Taugourdeau, 2007. "Fiscal federalism and soft budget constraint: does the nature of public spending matter?," EconomiX Working Papers 2007-16, University of Paris West - Nanterre la Défense, EconomiX.
    6. Yingyi Qian & Gerard Roland, "undated". "Federalism and the Soft Budget Constraint," Working Papers 97045, Stanford University, Department of Economics.
    7. Emmanuelle Taugourdeau, 2006. "Does tax competition soften regional budget constraint ?," Post-Print halshs-00094283, HAL.
    8. 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.
    9. Breuille, Marie-Laure & Madies, Thierry & Taugourdeau, Emmanuelle, 2006. "Does tax competition soften regional budget constraint?," Economics Letters, Elsevier, vol. 90(2), pages 230-236, February.
    10. János Kornai & Eric Maskin & Gérard Roland, 2003. "Understanding the Soft Budget Constraint," Journal of Economic Literature, American Economic Association, vol. 41(4), pages 1095-1136, December.
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