Too-big-to-fail in federations?

Zarko Kalamov and Klaas Staal

Regional Science and Urban Economics, 2023, vol. 101, issue C

Abstract: We consider jurisdictions of different population size that provide local public goods with positive spillovers. Matching grants can induce optimal expenditure levels, but the regions can exploit the rationale behind this system to induce bailouts. We formalize the too-big-to-fail result of Wildasin (1997) by proving that it exists in a subgame-perfect Nash equilibrium, in which the central government’s decisions are taken by regional representatives. Furthermore, our model contains the too-big-to-fail and too-small-to-fail outcomes as special cases, and we are the first to derive the conditions under which each result emerges.

Keywords: Bailouts; Soft-budget constraints; Spillovers (search for similar items in EconPapers)
JEL-codes: H4 H7 R1 (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:eee:regeco:v:101:y:2023:i:c:s0166046223000522

DOI: 10.1016/j.regsciurbeco.2023.103917

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