Bailouts and Soft Budget Constraints in Decentralized Government: A Synthesis and Survey of an Alternative View of Intergovernmental Grant Policy

Timothy Goodspeed ()

Hacienda Pública Española / Review of Public Economics, 2017, vol. 221, issue 2, 113-134

Abstract: This paper selectively surveys the theoretical literature to date on governmental soft budgets where governments are bailing out other governments. The traditional view of intergovernmental grants is that grants can be used by the central government to correct for positive spillover externalities or fiscal equalization. We first we explain how the set-up of the developing “soft budget constraint” view of grant policy differs from the traditional view in fundamental ways. We then use a simple workhorse model of intergovernmental soft budgets under perfect information to examine different motivations for central government bailouts and expand the usual textbook analysis of grants to illustrate the intertemporal distortions under the alternative view of grants. This type of model has been extended in various directions. We examine extensions that include capital taxation, tax competition, forms of equalizing grants, overlapping budget constraints, multiple grant instruments, and the case when public spending is an input to private production. We also briefly review certain papers that examine intergovernmental soft budgets and bailouts when public investment has uncertain returns, a feature of the original models relating to SOEs, and a closely related literature that deals with decentralized leadership and an analogy to Becker’s Rotten Kid Theorem. We conclude with some thoughts on directions for future research.

Keywords: Fiscal federalism; soft budget constraint; bailouts; decentralization; grants (search for similar items in EconPapers)
JEL-codes: H61 H7 H77 (search for similar items in EconPapers)
Date: 2017
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (16)

Downloads: (external link)
https://www.ief.es/comun/Descarga.cshtml?ruta=~/do ... tas/hpe/221_Art5.pdf (application/pdf)

Related works:
Working Paper: Bailouts and Soft Budget Constraints in Decentralized Government: A Synthesis and Survey of an Alternative View of Intergovernmental Grant Policy (2016)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:hpe:journl:y:2017:v:221:i:2:p:113-134

Access Statistics for this article

More articles in Hacienda Pública Española / Review of Public Economics from IEF Contact information at EDIRC.
Bibliographic data for series maintained by Miguel Gómez de Antonio ().