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Soft Budget Constraints as a Risk Sharing Arrangement in an Economic Federation

Erica Lindahl () and Andreas Westermark ()
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Erica Lindahl: Department of Economics, Postal: Uppsala University, P.O. Box 513, SE-751 20 Uppsala, Sweden

No 2006:5, Working Paper Series from Uppsala University, Department of Economics

Abstract: We analyze a model where the federal government provides risk sharing arrangements to municipalities investing in a local public good. The risk sharing arrangements are an income equalization system and a system allowing for a soft budget constraint, i.e., a bailout. Our main result is that a bailout system in combination with income equalization can be a more efficient risk sharing arrangement than an income equalization system only. Thus, the introduction of a bailout system is welfare improving.

Keywords: Bailout; Fiscal federalism (search for similar items in EconPapers)
JEL-codes: H72 H77 (search for similar items in EconPapers)
Pages: 22 pages
Date: 2006-01-26
New Economics Papers: this item is included in nep-pbe, nep-pol and nep-ure
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