Abstract

http://ssrn.com/abstract=1888847
 
 

References (46)



 


 



Institutionalized Bailouts and Fiscal Policy: Consequences of Soft Budget Constraints


Alexander Fink


University of Leipzig

Thomas Stratmann


George Mason University - Buchanan Center Political Economy; CESifo (Center for Economic Studies and Ifo Institute); Harvard University - Edmond J. Safra Center for Ethics

August 2011

Kyklos, Vol. 64, Issue 3, pp. 366-395, 2011

Abstract:     
States have soft budget constraints when they can expect a bailout by the federal government in the event of a financial crisis. This gives rise to incentives for unsound state fiscal policy. We test whether states with softer budget constraints have higher debts and deficits, receive more bailout funds, spend funds less efficiently, and are more likely to allocate funds to programs benefiting special interests. Exogenous variation in soft budget constraints across states and over time allows the identification of the effect of budget constraint softness on state fiscal policy. We take advantage of the fact that in Germany the states' political influence per state citizen is exogenous and varies because voting weights differ in the upper chamber of the German parliament. The stronger the political influence per state citizen, the softer the budget constraint. We show that states with softer budget constraint have higher deficits and debts, and receive more bailout funds. Further, overrepresented states are less efficient in spending public funds and are more prone to respond to rent seeking by interest groups.

Number of Pages in PDF File: 30

Accepted Paper Series


Date posted: July 19, 2011  

Suggested Citation

Fink, Alexander and Stratmann, Thomas, Institutionalized Bailouts and Fiscal Policy: Consequences of Soft Budget Constraints (August 2011). Kyklos, Vol. 64, Issue 3, pp. 366-395, 2011. Available at SSRN: http://ssrn.com/abstract=1888847 or http://dx.doi.org/10.1111/j.1467-6435.2011.00511.x

Contact Information

Alexander Fink (Contact Author)
University of Leipzig ( email )
Grimmaische Str. 12
Leipzig, 04109
HOME PAGE: http://www.alexander-fink.com
Thomas Stratmann
George Mason University - Buchanan Center Political Economy ( email )
4400 University Drive
Fairfax, VA 22030
United States
703-993-2330 (Phone)
CESifo (Center for Economic Studies and Ifo Institute)
Poschinger Str. 5
Munich, DE-81679
Germany
Harvard University - Edmond J. Safra Center for Ethics ( email )
124 Mount Auburn Street
Suite 520N
Cambridge, MA 02138
United States

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