Size and Soft Budget Constraints
38 Pages Posted: 7 Dec 2006
Date Written: November 2006
Abstract
There is much evidence against the so-called "too big to fail" hypothesis in the case of bailouts to sub-national governments. We look at a model where districts of different size provide local public goods with positive spillovers. Matching grants of a central government can induce socially-efficient provision, but districts can still exploit the intervening central government by inducing direct financing. We show that the ability of a district to induce a bailout from the central government and district size are negatively correlated.
Keywords: bailouts, soft-budget constraints, jurisdictional size, public goods, spillovers
JEL Classification: H4, H7, R1
Suggested Citation: Suggested Citation
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