Restricted Bailouts and the Commitment Problem in Federations

Karolina Kaiser

No 62, Working Papers from Bavarian Graduate Program in Economics (BGPE)

Abstract: Standard models of soft budget constraints consider bailouts as pure monetary transfers. However, in practice often additional obligations or restrictions, such as savings goals, are linked to monetary bailouts. This paper analyzes in a model of a federation if such restrictions change eco- nomic outcomes in an soft budget constraint environment and under what circumstances they can increase welfare as compared to pure soft budget and hard budget regimes. We ?nd that restrictions generally harden budget constraints, but not necessarily increase welfare. The evaluation crucially depends on the tax endowment of the central government and on the shape of preferences.

Keywords: bailouts; soft budget constraints; federalism (search for similar items in EconPapers)
JEL-codes: H63 H74 H77 (search for similar items in EconPapers)
Pages: 34 pages
Date: 2008-06
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https://bgpe.cms.rrze.uni-erlangen.de/files/2023/0 ... m-in-Federations.pdf First version, 2008 (application/pdf)

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Persistent link: https://EconPapers.repec.org/RePEc:bav:wpaper:062_kaiser

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