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Restricted Bailouts and the Commitment Problem in Federations

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  • Karolina Kaiser

Abstract

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.

Suggested Citation

  • Karolina Kaiser, 2008. "Restricted Bailouts and the Commitment Problem in Federations," Working Papers 062, Bavarian Graduate Program in Economics (BGPE).
    • Handle: RePEc:bav:wpaper:062_kaiser
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    References listed on IDEAS

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    More about this item

    Keywords

    bailouts; soft budget constraints; federalism;
    All these keywords.

    JEL classification:

    • H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism
    • H74 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Borrowing
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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