 Moral Hazard and Bail‐Out in Fiscal Federations: Evidence for the German LänderKirsten H. Heppke‐Falk and Guntram Wolff Kyklos, 2008, vol. 61, issue 3, 425-446 Abstract: We identify investor moral hazard in the German fiscal federation. Our identification strategy is based on a variable, which was used by the German Federal Constitutional Court as an indicator to determine eligibility of two German states (Länder) to a bail‐out, the interest payments‐to‐revenue ratio. While risk premia measured in the German sub‐national bond market react significantly to the relative debt level of a state (Land), we also find that a larger interest payments‐to‐revenue ratio counter‐intuitively lowers risk premia significantly. Furthermore, with increasing values the risk premia decrease more strongly. This is evidence of investor moral hazard, because a larger indicator value increases the likelihood of receiving a bail‐out payment. Our findings are robust to a variety of sample changes. In addition, we provide a case study of the recent Federal Constitutional Court ruling on the Land Berlin, which had filed for additional federal funds. The negative response of the court did not lead to a change in financial markets' bail‐out expectations. In sum, our results indicate significant investor moral hazard in the sub‐national German bond market. Date: 2008 Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:bla:kyklos:v:61:y:2008:i:3:p:425-446 Ordering information: This journal article can be ordered from Access Statistics for this article Kyklos is currently edited by Rene L. Frey More articles in Kyklos from Wiley Blackwell |
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