Who's Coming to the Rescue? Revenue-Sharing Slumps and Implicit Bailouts During the Great Recession

37 Pages Posted: 13 Jul 2016

See all articles by Dirk Foremny

Dirk Foremny

University of Barcelona - Institut d'Economia de Barcelona (IEB) ; CESifo (Center for Economic Studies and Ifo Institute)

Albert Sole-Olle

University of Barcelona; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: May 15, 2016

Abstract

This paper analyzes the distribution of discretionary transfers from higher tiers of government in the process of fiscal adjustment in local jurisdictions which were hit by a negative revenue shock in formula transfers. Spanish local governments experienced a 30% fall in their revenue-sharing revenues at the beginning of the Great Recession. We use a 'difference-in-discontinuities' design to identify the causal effect of that shock on the amount of discretionary grants provided by three higher tiers of government (i.e., central, regional, and provincial) and on other budget items (i.e., spending and taxation). We identify these effects using an exogenous variation in formula transfers, as the losses during the crisis of municipalities above the 5,000 population threshold were greater than the losses of those below this threshold. We find that, on average, municipalities above and below the 5,000 inhabitant threshold did not differentially adjust their budgets during the crisis. Rather, we find that for themost indebted municipalities, a substantial share of the shock was absorbed by discretionary grants provided by regional and provincial governments.

Keywords: intergovernmental transfers, bailouts, fiscal consolidation

JEL Classification: E62, H72, R5

Suggested Citation

Foremny, Dirk and Sole-Olle, Albert, Who's Coming to the Rescue? Revenue-Sharing Slumps and Implicit Bailouts During the Great Recession (May 15, 2016). ZEW - Centre for European Economic Research Discussion Paper No. 16-049, Available at SSRN: https://ssrn.com/abstract=2808437 or http://dx.doi.org/10.2139/ssrn.2808437

Dirk Foremny (Contact Author)

University of Barcelona - Institut d'Economia de Barcelona (IEB) ( email )

c/ John M. Keynes, 1-11
Barcelona, 08034
Spain

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

Albert Sole-Olle

University of Barcelona ( email )

Gran Via de les Corts Catalanes, 585
Barcelona, 08007
Spain

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

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