Bailouts and Austerity

CEGE Discussion Paper No. 212

45 Pages Posted: 23 Jul 2014

Date Written: July 22, 2014


This paper studies with disaggregated budget data how expenditures, revenues, and borrowing evolve in municipalities that receive bailouts. It asks whether higher-level governments enforce austerity measures after bailing out indebted municipalities. The sample consists of 421 municipalities in the German federal state of Hesse over the 1997-2010 period. The results indicate that municipalities cut personnel, construction, and social expenditures, increase tax revenues and property tax rates, and reduce deficits after they receive a bailout from the state government. The state government appears to be both able and willing to enforce austerity after granting a bailout.

Keywords: Subnational bailouts, soft budget constraints, local fiscal policy

JEL Classification: H30, H74, H77

Suggested Citation

Baskaran, Thushyanthan, Bailouts and Austerity (July 22, 2014). CEGE Discussion Paper No. 212, Available at SSRN: or

Thushyanthan Baskaran (Contact Author)

University of Goettingen (Göttingen) ( email )

Platz der Gottinger Sieben 3
Gottingen, D-37073

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