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Fiscal federalism and soft budget constraint: does the nature of public spending matter?

  • Marie-Laure Breuillé
  • Thierry Madiès
  • Emmanuelle Taugourdeau

This paper analyses the impact of both the nature of regional public spending and the federal government’s fiscal tools on the softness of the regional budget constraint and the regional provision of public good. We show that i) whatever the nature of regional public spending, the regional budget constraint is harder when the federal government can no longer manipulate its lump sum tax and ii) under the assumption that the federal government can no longer manipulate its lump sum tax, the federal bailout is lower when the region provides a public input rather than a public good but the regional budget constraint can be either softer or harder.

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Paper provided by University of Paris West - Nanterre la Défense, EconomiX in its series EconomiX Working Papers with number 2007-16.

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Length: 17 pages
Date of creation: 2007
Date of revision:
Handle: RePEc:drm:wpaper:2007-16
Contact details of provider: Postal: 200 Avenue de la République, Bât. G - 92001 Nanterre Cedex
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  1. Michael J. Keen & Christos Kotsogiannis, 2002. "Does Federalism Lead to Excessively High Taxes?," American Economic Review, American Economic Association, vol. 92(1), pages 363-370, March.
  2. WILDASIN, David, . "Nash equilibria in models of fiscal competition," CORE Discussion Papers RP 804, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  3. Justman, Moshe & Thisse, Jacques-Francois & van Ypersele, Tanguy, 2005. "Fiscal competition and regional differentiation," Regional Science and Urban Economics, Elsevier, vol. 35(6), pages 848-861, November.
  4. KEEN, Michael & MARCHAND, Maurice, 1996. "Fiscal Competition and the Pattern of Public Spending," CORE Discussion Papers 1996001, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  5. Pettersson-Lidbom, Per & Dahlberg, Matz, 2003. "An Empirical Approach for Evaluating Soft Budget Constraints," Working Paper Series 2003:28, Uppsala University, Department of Economics.
  6. J. Kornai & E. Maskin & G. Roland., 2004. "Understanding the Soft Budget Constraint," VOPROSY ECONOMIKI, N.P. Redaktsiya zhurnala "Voprosy Economiki", vol. 11.
  7. Kothenburger, Marko, 2004. "Tax competition in a fiscal union with decentralized leadership," Journal of Urban Economics, Elsevier, vol. 55(3), pages 498-513, May.
  8. 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, June.
  9. Yingyi Qian & Gerard Roland, . "Federalism and the Soft Budget Constraint," Working Papers 97045, Stanford University, Department of Economics.
  10. Justman, Moshe & Thisse, Jacques-François & van Ypersele, Tanguy, 2001. "Taking the Bite Out of Fiscal Competition," CEPR Discussion Papers 3109, C.E.P.R. Discussion Papers.
  11. Timothy Goodspeed, 2002. "Bailouts in a Federation," International Tax and Public Finance, Springer, vol. 9(4), pages 409-421, August.
  12. Jan-Egbert Sturm & Gerard H. Kuper & Jakob de Haan,, 1996. "Modelling government investment and economic growth at the macro level: A review," Working Papers 29, Centre for Economic Research, University of Groningen and University of Twente.
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