Size, Spillovers and Soft Budget Constraints

Ernesto Crivelli (ecrivelli@imf.org) and Klaas Staal
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Klaas Staal: University of Bonn

No 2008_17, Discussion Paper Series of the Max Planck Institute for Research on Collective Goods from Max Planck Institute for Research on Collective Goods

Abstract: There is much evidence against the so-called "too big to fail" hypothesis in the case of bailouts to subnational governments. We look at a model where districts of different size provide local public goods with positive spillovers. Matching grants of a central government can induce so-cially-efficient provision, but districts can still exploit the intervening central government by induc-ing direct financing. We show that the ability and willingness of a district to induce a bailout and district size are negatively correlated. We also discuss the effect economies of scale in local public goods provision has on the bailout policies and argue that these policies can be subgame perfect equilibrium strategies.

Keywords: bailouts; soft-budget constraints; district size; spillovers (search for similar items in EconPapers)
JEL-codes: H4 H7 R1 (search for similar items in EconPapers)
Pages: 37 pages
Date: 2008-04
New Economics Papers: this item is included in nep-cdm and nep-ure
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (15)

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Related works:
Journal Article: Size, spillovers and soft budget constraints (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:mpg:wpaper:2008_17

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