Who's coming to the rescue? Revenue-sharing slumps and implicit bailouts during the Great Recession

Dirk Foremny and Albert Solé-Ollé

No 16-049, ZEW Discussion Papers from ZEW - Leibniz Centre for European Economic Research

Abstract: This paper analyzes the distribution of discretionary transfers from higher tiers of government in the process of fiscal adjustment in local jurisdictions which were hit by a negative revenue shock in formula transfers. Spanish local governments experienced a 30% fall in their revenue-sharing revenues at the beginning of the Great Recession. We use a 'difference-in-discontinuities' design to identify the causal effect of that shock on the amount of discretionary grants provided by three higher tiers of government (i.e., central, regional, and provincial) and on other budget items (i.e., spending and taxation). We identify these effects using an exogenous variation in formula transfers, as the losses during the crisis of municipalities above the 5,000 population threshold were greater than the losses of those below this threshold. We find that, on average, municipalities above and below the 5,000 inhabitant threshold did not differentially adjust their budgets during the crisis. Rather, we find that for themost indebted municipalities, a substantial share of the shock was absorbed by discretionary grants provided by regional and provincial governments.

Keywords: intergovernmental transfers; bailouts; fiscal consolidation (search for similar items in EconPapers)
JEL-codes: E62 H72 R5 (search for similar items in EconPapers)
Date: 2016
New Economics Papers: this item is included in nep-eec, nep-mac and nep-ure
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:zbw:zewdip:16049

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