Bailouts in a federation: A cooperative legislature at work

Konferenzbeitrag

This paper revisits the soft budget constraint problem arising in decentralised countries. Capturing the specific dynamics of political decision making in a federation, new light is shed on the incentives at work when lower-level (state) governments overborrow and are bailed out by the federal level. An intertemporal model developed by Goodspeed (2002) is supplemented by the citizen-candidate approach of Besley and Coate (1997), to further align federal decision making with reality. In our model, where a cooperative legislature of locally elected representatives decides on federal grants going to the states, voters are shown to elect candidates with a higher preference for debt accumulation than would be expected. This strategic voting behaviour not only leads to overly generous bailout policies. Also, and compared to a setting where federal decision making follows the median voter, states are proven to overborrow more inefficiently because of this federal generosity. A case can then be made for federal constituencies where politicians are elected from across the entire federation, which would neutralize these additional inefficiencies.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: 53rd Congress of the European Regional Science Association: "Regional Integration: Europe, the Mediterranean and the World Economy", 27-31 August 2013, Palermo, Italy

Classification and Topics

• Classification: Wirtschaft
• Subject: Fiscal decentralisation ; bailouts ; soft budget constraint ; citizen-candidate model ; cooperative legislature

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Sas, Willem
• Event: Veröffentlichung
• (who): European Regional Science Association (ERSA)
• (where): Louvain-la-Neuve
• (when): 2013

Further information

• Handle: http://hdl.handle.net/10419/123998
• Last update: 10.03.2025, 11:43 AM CET