(When) Are Intergovernmental Transfers Used to Bail Out Regional Governments? Evidence from Spain 1986-2001

Pilar Sorribas-Navarro ()
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Pilar Sorribas-Navarro: Institut d'Economia de Barcelona (IEB); Universitat de Barcelona (UB)

No 2006/7, Working Papers from Institut d'Economia de Barcelona (IEB)

Abstract: This paper analyses the main determinants of a central government’s decision to use grants to bail out regional governments (i.e., the determinants of additional grants assigned by a central government to regions due to an increase in their issue of debt). The estimated grant equation is derived from a model of a federation, based on Goodspeed (2002), where regions are Stakelberg leaders and the central government’s objective is to maximize a weighted sum of the welfare of the representative consumers from all the regions. The specified equation is estimated separately with a panel data set of discretionary and non-discretionary grants for 15 Spanish regions during the period 1986-2001, using the within and the GMM estimators (Arellano and Bond, 1991), respectively. The results show that the Spanish central government uses grants to partially bailout regions. Such fiscal rescue operations are more intense when: i) the region is responsible for providing health care; ii) debt limits exist (and they have not been properly designed); iii) regional voters are relatively indifferent between the incumbent and the challenger (i.e., there is a high proportion of swing voters).

Keywords: Intergovernmental grants; bailouts; political economy. (search for similar items in EconPapers)
JEL-codes: H1 H77 O4 (search for similar items in EconPapers)
Pages: 42 pages
Date: 2006
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