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The role of matching grants as a commitment device in the federation model with a repeated soft budget setting

Nobuo Akai () and Motohiro Sato
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Nobuo Akai: Osaka University
Motohiro Sato: Hitotsubashi University

Economics of Governance, 2019, vol. 20, issue 1, 23-39

Abstract: Abstract This paper revisits the soft budget versus the hard budget constraint in federations. By extending Besfamille and Lockwood (Int Econ Rev 49:577–593, 2008), who examine a case where the soft budget is ex ante favorable, we consider a model that allows the federal government to use a matching grant as an ex post policy instrument. We establish that this instrument acts as a commitment device and may improve social welfare compared with the situation in which the government’s ex ante policy options are limited to a hard or soft budget.

Keywords: Soft budget; Matching grant; Repeated game; Commitment device (search for similar items in EconPapers)
JEL-codes: H71 H72 H73 H77 (search for similar items in EconPapers)
Date: 2019
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