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Assist or Desist? Conditional Bailouts and Fiscal Discipline in Local Governments

Central government bailouts of local governments are commonly viewed as a recipe for local fiscal indiscipline, as local governments learn that the center will come to the rescue in times of trouble. However, little is known about the consequences of bailouts granted conditional on local governments first making efforts to improve the situation. We examine a case in which the Swedish central government provided conditional grants to 36 financially troubled municipalities. We use the synthetic control method to identify suitable comparison units for each of the 36 municipalities. To compare the development of costs and the fiscal surplus of admitted municipalities to that of their most similar counterparts during the decade after the program, we then estimate fixed effects regressions on the resulting sample. The analysis suggests that conditional bailouts did not erode, and may even had induced greater fiscal discipline.

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File URL: http://project.nek.lu.se/publications/workpap/papers/WP12_24.pdf
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Paper provided by Lund University, Department of Economics in its series Working Papers with number 2012:24.

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Length: 38 pages
Date of creation: 20 Sep 2012
Date of revision: 28 Oct 2013
Publication status: Published as Dietrichson, Jens and Lina Maria Ellegård, 'Assist or Desist? Conditional Bailouts and Fiscal Discipline in Local Governments' in European Journal of Political Economy, 2015, pages 153-168.
Handle: RePEc:hhs:lunewp:2012_024
Contact details of provider: Postal:
Department of Economics, School of Economics and Management, Lund University, Box 7082, S-220 07 Lund,Sweden

Phone: +46 +46 222 0000
Fax: +46 +46 2224613
Web page: http://www.nek.lu.se/en

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