Size, Spillovers and Soft Budget Constraints

37 Pages Posted: 15 Jul 2008

See all articles by Ernesto Crivelli

Ernesto Crivelli

International Monetary Fund (IMF)

Klaas Staal

Institute for International Economic Policy (IIW), University of Bonn

Date Written: April 1, 2008

Abstract

There is much evidence against the so-called "too big to fail" hypothesis in the case of bailouts to subnational governments. We look at a model where districts of different size provide local public goods with positive spillovers. Matching grants of a central government can induce socially-efficient provision, but districts can still exploit the intervening central government by inducing direct financing. We show that the ability and willingness of a district to induce a bailout and district size are negatively correlated. We also discuss the effect economies of scale in local public goods provision has on the bailout policies and argue that these policies can be subgame perfect equilibrium strategies.

Keywords: bailouts, soft-budget constraints, district size, spillovers

JEL Classification: H4, H7, R1

Suggested Citation

Crivelli, Ernesto and Staal, Klaas, Size, Spillovers and Soft Budget Constraints (April 1, 2008). MPI Collective Goods Preprint, No. 2008/17, Available at SSRN: https://ssrn.com/abstract=1160160 or http://dx.doi.org/10.2139/ssrn.1160160

Ernesto Crivelli (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Klaas Staal

Institute for International Economic Policy (IIW), University of Bonn ( email )

Lennestr. 37
Bonn, 53113
Germany
+49(0)228 731885 (Phone)

HOME PAGE: http://www.iiw.uni-bonn.de/people/staal/index.html

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
70
Abstract Views
891
rank
375,689
PlumX Metrics