Is Centralization a Solution to the Soft Budget Constraint Problem?

45 Pages Posted: 18 Oct 2012 Last revised: 20 Oct 2013

See all articles by Avi Ben-Bassat

Avi Ben-Bassat

Hebrew University of Jerusalem - Department of Economics

Momi Dahan

Hebrew University of Jerusalem - School of Public Policy; CESifo (Center for Economic Studies and Ifo Institute)

Esteban F. Klor

Hebrew University of Jerusalem - Department of Economics; Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: October 18, 2013

Abstract

This paper focuses on the centralization program implemented in Israel in 2004 to analyze whether the administrative subordination of municipalities is an effective policy to deal with problems related to soft-budget constraint of lower level governments. The results consistently show, for different specifications and samples of municipalities, that this program brought a substantial decrease of municipalities’ expenditures (mostly because of decreases on salary payments), and an increase of local property tax collection. Our analysis shows that all of the fiscal impact of the program is due to the appointment of an accountant that reports directly to the central government, a relatively mild form of administrative subordination. In contrast, more intrusive forms of subordination, like the central imposition of a recovery program, do not result in any substantial improvement of municipalities’ fiscal situation. This leads us to conclude that a mild form of administrative subordination is an effective tool to cope with problems related to soft-budget constraints, whereas political subordination is not an effective tool to reach that goal.

Keywords: soft budget constraints, centralization, local government, bailout program, hierarchical subordination, political institutions

JEL Classification: D82, H77

Suggested Citation

Ben-Bassat, Avi and Dahan, Momi and Klor, Esteban F., Is Centralization a Solution to the Soft Budget Constraint Problem? (October 18, 2013). Available at SSRN: https://ssrn.com/abstract=2163475 or http://dx.doi.org/10.2139/ssrn.2163475

Avi Ben-Bassat

Hebrew University of Jerusalem - Department of Economics ( email )

Mount Scopus
Jerusalem, 91905
Israel

Momi Dahan

Hebrew University of Jerusalem - School of Public Policy ( email )

Mount Scopus
Jerusalem 91905
Israel
972-2-5883709 (Phone)
972-2-5880047 (Fax)

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Esteban F. Klor (Contact Author)

Hebrew University of Jerusalem - Department of Economics ( email )

Mount Scopus
Jerusalem, 91905
Israel
+972 2 588 3143 (Phone)
+972 2 581 6071 (Fax)

HOME PAGE: http://economics.huji.ac.il/facultye/klor/klor.htm

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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