Institutionalized Bailouts and Fiscal Policy: The Consequences of Soft Budget Constraints
States have soft budget constraints when they can expect a bailout by the federal government in the event of a financial crisis. This gives rise to incentives for unsound state fiscal policy. We test whether states with softer budget constraints have higher debt and deficits, receive more bailouts funds, spend funds less efficiently, and are more likely to allocate funds to programs benefiting special interests. Exogenous variation in soft budget constraints across states and over time allows the identification of budget constraint softness on state fiscal policy. We take advantage of the fact that in Germany, states’ political influence is exogenous because voting weights differ in the upper chamber of the German parliament. The stronger the political influence of states, the softer their budget constraints. We show that states with softer budget constraint have higher deficits and debts, and receive more bailouts funds. Further, overrepresented states are less efficient in spending public funds and are more prone to respond to rent seeking by interest groups.
|Date of creation:||2009|
|Contact details of provider:|| Postal: Poschingerstrasse 5, 81679 Munich|
Phone: +49 (89) 9224-0
Fax: +49 (89) 985369
Web page: http://www.cesifo-group.de
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Kornai, J, 1979. "Resource-Constrained versus Demand-Constrained Systems," Econometrica, Econometric Society, vol. 47(4), pages 801-819, July.
- Brian Knight, 2004. "Legislative Representation, Bargaining Power, and the Distribution of Federal Funds: Evidence from the U.S. Senate," NBER Working Papers 10385, National Bureau of Economic Research, Inc.
- Hans Pitlik & Friedrich Schneider & Harald Strotmann, 2005.
"Legislative Malapportionment and the Politicization of Germany's Intergovernmental Transfer System,"
Diskussionspapiere aus dem Institut für Volkswirtschaftslehre der Universität Hohenheim
254/2005, Department of Economics, University of Hohenheim, Germany.
- Hans Pitlik & Friedrich Schneider & Harald Strotmann, 2006. "Legislative Malapportionment and the Politicization of Germany's Intergovernmental Transfer System," Public Finance Review, , vol. 34(6), pages 637-662, November.
- Hans Pitlik & Friedrich Schneider & Harald Strotmann, 2005. "Legislative Malapportionment and the Politicization of Germany’s Intergovernmental Transfer System," CESifo Working Paper Series 1426, CESifo Group Munich.
- Hans Pitlik & Friedrich Schneider & Harald Strotmann, 2005. "Legislative Malapportionment and the Politicization of Germany's Intergovernmental Transfer System," IAW Discussion Papers 19, Institut für Angewandte Wirtschaftsforschung (IAW).
- Mathias Dewatripont & Eric Maskin, 1995.
"Credit and efficiency in centralized and decentralized economies,"
ULB Institutional Repository
2013/9603, ULB -- Universite Libre de Bruxelles.
- 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.
- Mathias Dewatripont & Eric Maskin, 2004. "Credit and efficiency in centralized and decentralized economies," ULB Institutional Repository 2013/9605, ULB -- Universite Libre de Bruxelles.
- Janos Kornai & Eric Maskin & Gerard Roland, 2002.
"Understanding the Soft Budget Constraint,"
Economics Working Papers
0019, Institute for Advanced Study, School of Social Science.
- J. Kornai & E. Maskin & G. Roland., 2004. "Understanding the Soft Budget Constraint," VOPROSY ECONOMIKI, N.P. Redaktsiya zhurnala "Voprosy Economiki", vol. 11.
- 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.
- J. Kornai & E. Maskin & G. Roland., 2004. "Understanding the Soft Budget Constraint," VOPROSY ECONOMIKI, N.P. Redaktsiya zhurnala "Voprosy Economiki", vol. 12.
- Samuels, David & Snyder, Richard, 2001. "The Value of a Vote: Malapportionment in Comparative Perspective," British Journal of Political Science, Cambridge University Press, vol. 31(04), pages 651-671, October.
- Philip J. Grossman, 1987.
"A Political Theory of Inter-Governmental Grants,"
School of Economics Working Papers
1987-06, University of Adelaide, School of Economics.
- Kornai, Janos, 1998. "The Concept of the Soft Budget Constraint Syndrome in Economic Theory," Journal of Comparative Economics, Elsevier, vol. 26(1), pages 11-17, March.
- Pitlik, Hans & Schmid, Gunther & Strotmann, Harald, 2001. "Bargaining Power of Smaller States in Germany's Landerfinanzausgleich 1979-90," Public Choice, Springer, vol. 109(1-2), pages 183-201, October.
- Stratmann, Thomas, 1992. "Are Contributions Rational? Untangling Strategies of Political Action Committees," Journal of Political Economy, University of Chicago Press, vol. 100(3), pages 647-664, June.
- Atlas, Cary M, et al, 1995. "Slicing the Federal Government Net Spending Pie: Who Wins, Who Loses, and Why," American Economic Review, American Economic Association, vol. 85(3), pages 624-629, June.
- Döring, Thomas & Voigt, Stefan, 2006. "Reforming federalism German style: A first step in the right direction," Volkswirtschaftliche Diskussionsbeiträge 87, Faculty of Economics and Management, University of Kassel.
- Hauk, William R. & Wacziarg, Romain, 2007. "Small States, Big Pork," Quarterly Journal of Political Science, now publishers, vol. 2(1), pages 95-106, March.
- Kornai, Janos, 1986.
"The Soft Budget Constraint,"
Wiley Blackwell, vol. 39(1), pages 3-30.
- Thiess Buettner, 2005.
"The Incentive Effect of Fiscal Equalization Transfers on Tax Policy,"
CESifo Working Paper Series
1404, CESifo Group Munich.
- Buettner, Thiess, 2006. "The incentive effect of fiscal equalization transfers on tax policy," Journal of Public Economics, Elsevier, vol. 90(3), pages 477-497, February.
- Büttner, Thiess, 2005. "The Incentive Effect of Fiscal Equalization Transfers on Tax Policy," Center for European, Governance and Economic Development Research Discussion Papers 37, University of Goettingen, Department of Economics.
- Weingast, Barry R., 2009. "Second generation fiscal federalism: The implications of fiscal incentives," Journal of Urban Economics, Elsevier, vol. 65(3), pages 279-293, May.
- David E. Wildasin, 2001.
"Externalities and Bailouts: Hard and Soft Budget Constraints in Intergovernmental Fiscal Relations,"
- 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.
- Sven Jari Stehn & Annalisa Fedelino, 2009. "Fiscal Incentive Effects of the German Equalization System," IMF Working Papers 09/124, .
- Charles Blankart, 2000. "The Process of Government Centralization: A Constitutional View," Constitutional Political Economy, Springer, vol. 11(1), pages 27-39, March.
- Jameson Boex & Jorge Martinez-Vazquez, 2005. "The Determinants of the Incidence of Intergovernmental Grants: A Survey of the International Experience," International Center for Public Policy Working Paper Series, at AYSPS, GSU paper0509, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.
- Gary Hoover & Paul Pecorino, 2005. "The Political Determinants of Federal Expenditure at the State Level," Public Choice, Springer, vol. 123(1), pages 95-113, April.
- Charles B. Blankart & Achim Klaiber, 2006. "Subnational Government Organisation And Public Debt Crises," Economic Affairs, Wiley Blackwell, vol. 26(3), pages 48-54, 09.
- Jonathan A. Rodden & Gunnar S. Eskeland (ed.), 2003. "Fiscal Decentralization and the Challenge of Hard Budget Constraints," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262182297, September.
When requesting a correction, please mention this item's handle: RePEc:ces:ceswps:_2827. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Klaus Wohlrabe)
If references are entirely missing, you can add them using this form.