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Debt Bailouts and Constitutions

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  • Emanuel Kohlscheen

    (Economics Department, University of Warwick.)

Abstract

A demand based theory of sub-national debt bailouts is presented. It is shown that revenue sharing (RS) arrangements alter the demand for bailouts among politicians with regional constituencies as a bailout usually implies a shift of taxation to the federal tier. Automatic RS may lead to the formation of pro-bailout coalitions formed by indebted states and states that are net recipients of the RS arrangement. Also, RS can act as a commitment device for compensating payments among state representatives, making a bailout politically rational. The model shows that the state debt bailouts approved by the Brazilian Senate prior to the enactment of the Fiscal Responsibility Act were fully consistent with politicians that maximize the proceeds accruing to their constituencies.

Suggested Citation

  • Emanuel Kohlscheen, 2008. "Debt Bailouts and Constitutions," The Warwick Economics Research Paper Series (TWERPS) 862, University of Warwick, Department of Economics.
  • Handle: RePEc:wrk:warwec:862
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    File URL: https://www2.warwick.ac.uk/fac/soc/economics/research/workingpapers/2008/twerp_862.pdf
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    References listed on IDEAS

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    Cited by:

    1. Eichler, Stefan & Hofmann, Michael, 2013. "Sovereign default risk and decentralization: Evidence for emerging markets," European Journal of Political Economy, Elsevier, vol. 32(C), pages 113-134.

    More about this item

    Keywords

    bailout ; commitment ; Constitutions ; debt ; federalism revenue sharing; soft budget constraints;

    JEL classification:

    • H70 - Public Economics - - State and Local Government; Intergovernmental Relations - - - General

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