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Is Centralization a Solution to the Soft Budget Constraint Problem?

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  • Ben-Bassat, Avi
  • Dahan, Momi
  • Klor, Esteban F

Abstract

This paper focuses on the centralization program implemented in Israel in 2004 to analyze whether the administrative subordination of municipalities is an effective policy to deal with problems related to soft-budget constraint of lower level governments. The results consistently show, for different specifications and samples of municipalities, that this program brought a substantial decrease of municipalities’ expenditures (mostly because of decreases on salary payments), and an increase of local property tax collection. Our analysis shows that all of the fiscal impact of the program is due to the appointment of an accountant that reports directly to the central government, a relatively mild form of administrative subordination. In contrast, more intrusive forms of subordination, like the central imposition of a recovery program, do not result in any substantial improvement of municipalities’ fiscal situation. This leads us to conclude that a mild form of administrative subordination is an effective tool to cope with problems related to soft-budget constraints, whereas political subordination is not an effective tool to reach that goal.

Suggested Citation

  • Ben-Bassat, Avi & Dahan, Momi & Klor, Esteban F, 2015. "Is Centralization a Solution to the Soft Budget Constraint Problem?," CEPR Discussion Papers 10789, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:10789
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    Cited by:

    1. Christofzik, Désirée I. & Kessing, Sebastian G., 2018. "Does fiscal oversight matter?," Journal of Urban Economics, Elsevier, vol. 105(C), pages 70-87.
    2. Borge, Lars-Erik & Hopland, Arnt O., 2020. "Less fiscal oversight, more adjustment," European Journal of Political Economy, Elsevier, vol. 63(C).
    3. János Kornai, 2014. "The soft budget constraint," Acta Oeconomica, Akadémiai Kiadó, Hungary, vol. 64(supplemen), pages 25-79, November.
    4. Kornai, János, 2014. "Bevezetés A puha költségvetési korlát című kötethez [Introduction to the author s volume entitled Soft Budget Constraint]," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(7), pages 845-897.
    5. Momi Dahan & Michel Strawczynski, 2016. "Budget Institutions and Government Effectiveness," CESifo Working Paper Series 6219, CESifo.
    6. Massimo Bordignon & Silvia Coretti & Massimiliano Piacenza & Gilberto Turati, 2020. "Hardening subnational budget constraints via administrative subordination: The Italian experience of recovery plans in regional health services," Health Economics, John Wiley & Sons, Ltd., vol. 29(11), pages 1378-1399, November.
    7. Rosta, Miklós, 2015. "Introduction of soft budget constraint to analyze public administration reforms. Some evidence from the Hungarian public administration reform," MPRA Paper 68473, University Library of Munich, Germany.
    8. Avi Ben-Bassat & Momi Dahan, 2016. "Biased Policy and Political Behavior," CESifo Working Paper Series 6269, CESifo.
    9. Momi Dahan & Itamar Yakir, 2019. "Revealed Political Favoritism: Evidence from the Allocation of State Lottery Grants in Israel," CESifo Working Paper Series 7882, CESifo.

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    More about this item

    Keywords

    bailout program; centralization; hierarchical subordination; local government; soft budget constraints;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • H57 - Public Economics - - National Government Expenditures and Related Policies - - - Procurement

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