Institutionalized Bailouts and Fiscal Policy: Consequences of Soft Budget Constraints

30 Pages Posted: 19 Jul 2011  

Alexander Fink

University of Leipzig

Thomas Stratmann

George Mason University - Buchanan Center Political Economy; CESifo (Center for Economic Studies and Ifo Institute)

Multiple version iconThere are 2 versions of this paper

Date Written: August 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.

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: https://ssrn.com/abstract=1888847 or http://dx.doi.org/10.1111/j.1467-6435.2011.00511.x

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

Paper statistics

Downloads
1
Abstract Views
316