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Soft-Budget Constraints and Local Expenditures

  • Takero Doi

    (Faculty of Economics, Keio University)

  • Toshihiro Ihori

    (Faculty of Economics, University of Tokyo)

This paper investigates how the soft budget constraint with grants from the central government to local governments tends to exaggerate inefficient local expenditures. We first develop a theoretical model, which explains soft budget problem in a multi-government setting. We then show that in Japan's case local governments implemented inefficient public investments and hence the bad outcome of soft budget problem occurred in the 1990s.

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File URL: http://www.cirje.e.u-tokyo.ac.jp/research/dp/2006/2006cf422.pdf
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Paper provided by CIRJE, Faculty of Economics, University of Tokyo in its series CIRJE F-Series with number CIRJE-F-422.

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Length: 33pages
Date of creation: May 2006
Date of revision:
Handle: RePEc:tky:fseres:2006cf422
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  1. Wildasin, David E., 2004. "The Institutions of Federalism: Toward an Analytical Framework," National Tax Journal, National Tax Association, vol. 57(2), pages 247-72, June.
  2. Persson, Torsten & Svensson, Lars E O, 1989. "Why a Stubborn Conservative Would Run a Deficit: Policy with Time-Inconsistent Preferences," The Quarterly Journal of Economics, MIT Press, vol. 104(2), pages 325-45, May.
  3. Michael Keen, 1997. "Vertical Tax Externalities in the Theory of Fiscal Federalism," IMF Working Papers 97/173, International Monetary Fund.
  4. 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.
  5. Alesina, Alberto & Tabellini, Guido, 1990. "A Positive Theory of Fiscal Deficits and Government Debt," Review of Economic Studies, Wiley Blackwell, vol. 57(3), pages 403-14, July.
  6. DelRossi, Alison F. & Inman, Robert P., 1999. "Changing the price of pork: the impact of local cost sharing on legislators' demands for distributive public goods," Journal of Public Economics, Elsevier, vol. 71(2), pages 247-273, February.
  7. 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.
  8. Nobuo Akai & Motohiro Sato, 2005. "leadership meets soft budget," CIRJE F-Series CIRJE-F-391, CIRJE, Faculty of Economics, University of Tokyo.
  9. Motohiro Sato, 2002. "Intergovernmental Transfers, Governance Structure and Fiscal Decentralization," The Japanese Economic Review, Japanese Economic Association, vol. 53(1), pages 55-76.
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