Soft budgets and local borrowing regulation in a dynamic decentralized leadership model with saving and free mobility

Nobuo Akai () and Motohiro Sato ()
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Nobuo Akai: Osaka University
Motohiro Sato: Hitotsubashi University

No 2009/20, Working Papers from Institut d'Economia de Barcelona (IEB)

Abstract: This paper considers a simple dynamic decentralized leadership model with local borrowing and regional productivity enhancing investment. The central government is benevolent but cannot commit. The local governments strategically act while accounting for the ex post motive of the central government. We then investigate inefficiency in the subgame perfect equilibrium. We analyze the effect of central control on local borrowings. It is revealed that the central control is of no use. The model is extended to the case with residential mobility which gives different policy implications.

Keywords: soft budget; local borrowing; local investment (search for similar items in EconPapers)
JEL-codes: H71 H72 H73 H77 (search for similar items in EconPapers)
Pages: 39 pages
Date: 2009
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Persistent link: https://EconPapers.repec.org/RePEc:ieb:wpaper:doc2009-20

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