Subnational Fiscal Behavior Under the Expectation of Federal Bailouts

Posted: 8 Sep 2011

See all articles by Ernesto Crivelli

Ernesto Crivelli

International Monetary Fund (IMF)

Date Written: March 1, 2011


This paper analyzes how subnational governments allocate own resources between current spending and infrastructure investment and decide on borrowing under the expectation of federal bailouts. It is assumed that states' borrowing possibilities increase with the expectation of such bailouts because the financial system is willing to fund a higher amount of public investment projects. As a result, state governments engage in an opportunistic behavior: they allocate a higher (lower) than optimal amount of own resources to current spending (infrastructure investment) and over‐borrow.

Keywords: fiscal federalism, soft budget constraints, local public investment, subnational borrowing

JEL Classification: H7, R5

Suggested Citation

Crivelli, Ernesto, Subnational Fiscal Behavior Under the Expectation of Federal Bailouts (March 1, 2011). Journal of Policy Reform, Vol. 14, No. 1, 2011, Available at SSRN:

Ernesto Crivelli (Contact Author)

International Monetary Fund (IMF) ( email )

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

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