Soft Budget Constraints as a Risk Sharing Arrangement in an Economic Federation
We analyze a model where the federal government provides risk sharing arrangements to municipalities investing in a local public good. The risk sharing arrangements are an income equalization system and a system allowing for a soft budget constraint, i.e., a bailout. Our main result is that a bailout system in combination with income equalization can be a more efficient risk sharing arrangement than an income equalization system only. Thus, the introduction of a bailout system is welfare improving.
|Date of creation:||26 Jan 2006|
|Contact details of provider:|| Postal: Department of Economics, Uppsala University, P. O. Box 513, SE-751 20 Uppsala, Sweden|
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- J. Kornai & E. Maskin & G. Roland., 2004.
"Understanding the Soft Budget Constraint,"
N.P. Redaktsiya zhurnala "Voprosy Economiki", vol. 12.
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