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Size and Soft Budget Constraints

  • Ernesto Crivelli
  • Klaas Staal

There is much evidence against the so-called "too big to fail" hypothesis in the case of bailouts to sub-national governments. We look at a model where districts of different size provide local public goods with positive spillovers. Matching grants of a central government can induce socially-efficient provision, but districts can still exploit the intervening central government by inducing direct financing. We show that the ability of a district to induce a bailout from the central government and district size are negatively correlated.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 1858.

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Date of creation: 2006
Date of revision:
Handle: RePEc:ces:ceswps:_1858
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  1. Yingyi Qian & Gerard Roland, . "Federalism and the Soft Budget Constraint," Working Papers 97045, Stanford University, Department of Economics.
  2. Eric S. Maskin, 1999. "Recent Theoretical Work on the Soft Budget Constraint," American Economic Review, American Economic Association, vol. 89(2), pages 421-425, May.
  3. Inman, Robert P, 1995. "How to Have a Fiscal Crisis: Lessons from Philadelphia," American Economic Review, American Economic Association, vol. 85(2), pages 378-83, May.
  4. Massimo Bordignon, 2000. "Problems of Soft Budget Constraints in Intergovernmental Relationships: The Case of Italy," Research Department Publications 3099, Inter-American Development Bank, Research Department.
  5. repec:oup:qjecon:v:112:y:1997:i:4:p:1027-56 is not listed on IDEAS
  6. Seitz, Helmut, 1999. "Subnational government bailouts in Germany," ZEI Working Papers B 20-1999, ZEI - Center for European Integration Studies, University of Bonn.
  7. 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.
  8. Sanguinetti, Pablo & Tommasi, Mariano, 2004. "Intergovernmental transfers and fiscal behavior insurance versus aggregate discipline," Journal of International Economics, Elsevier, vol. 62(1), pages 149-170, January.
  9. Jürgen Von Hagen & Massimo Bordignon & Bhajan S. Grewal & Per Peterson & Helmut Seitz & Matz Dahlberg, 2000. "Subnational Government Bailouts in OECD Countries: Four Case Studies," Research Department Publications 3100, Inter-American Development Bank, Research Department.
  10. Juan Pablo Nicolini & Josefina Posadas & Juan Sanguinetti & Pablo Sanguinetti & Mariano Tommasi, 2002. "Decentralization, Fiscal Discipline in Sub-National Governments and the Bailout Problem: The Case of Argentina," Research Department Publications 3160, Inter-American Development Bank, Research Department.
  11. János Kornai, 2014. "The soft budget constraint," Acta Oeconomica, Akadémiai Kiadó, Hungary, vol. 64(supplemen), pages 25-79, November.
  12. Pettersson-Lidbom, Per & Dahlberg, Matz, 2003. "An Empirical Approach for Evaluating Soft Budget Constraints," Working Paper Series 2003:28, Uppsala University, Department of Economics.
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