Subnational Government Bailouts in OECD Countries: Four Case Studies

Hagen, Jürgen von; Bordignon, Massimo; Dahlberg, Matz; Grewal, Bhajan; Peterson, Per; Seitz, Helmut

doi:10.2139/ssrn.1814672

Cited by 39 publications

(43 citation statements)

References 8 publications

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“…The asymmetry of jurisdiction size in federations might also exacerbate the commitment problem if the failure of a large state might create negative externalities for the rest of the federation-the "too big to fail phenomenon" (Wildasin, 1997). At the same time, a small over-represented jurisdiction might be "too small to fail" if it is in an especially favorable position to trade votes for bailouts that would be relatively inexpensive for the other constituent units to provide (Von Hagen, et al 2000).…”

Section: H6: Federalism Is Associated With Subnational Fiscal Indiscimentioning

confidence: 99%

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The Dilemma of Fiscal Federalism: Grants and Fiscal Performance around the World

Rodden¹

2002

American Journal of Political Science

526

344

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This paper uses cross-national data to examine the effects of federal fiscal and political institutions on the fiscal performance of subnational governments. Balanced budgets among subnational governments are found when either (1) the center imposes strong borrowing restrictions or (2) subnational governments have both wide-ranging taxing and borrowing autonomy. Large and persistent aggregate deficits occur when subnational governments are simultaneously dependent on general-purpose intergovernmental transfers and free to borrow-a combination found most frequently among constituent units in federations. Time-series cross-section analysis reveals that as countries increase their reliance on transfers over time, subnational and overall fiscal performance decline, especially when subnational governments have easy access to credit. These findings illuminate a key dilemma of fiscal federalism and a more precise notion of its dangers: When constitutionally constrained or politically fragmented central governments take on heavy co-financing obligations, they cannot credibly commit to ignore the fiscal problems of lower-level governments.

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Section: H6: Federalism Is Associated With Subnational Fiscal Indiscimentioning

confidence: 99%

“…But by no means is the phenomenon limited to formal federations (see, e.g. Von Hagen et al 2000). 28 See, e.g.…”

Section: Implications and Conclusionmentioning

confidence: 99%

The Dilemma of Fiscal Federalism: Grants and Fiscal Performance around the World

Rodden¹

2002

American Journal of Political Science

526

344

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“…If any, the empirical evidence points towards the opposite effect. As noted by von Hagen et al (2000), the two German states bailed out in the 1990s were the smallest ones in the West German federation and, in Italy, smaller municipalities and regions seem to have a higher willingness to request bailouts. The reason for these observations may simply be that central governments may be more willing to bail out smaller regions as costs are lower.…”

Section: The Role Of Bailout Expectationsmentioning

confidence: 89%

“…Alternatively, following the "too sensitive to fail" hypothesis (von Hagen et al, 2000, Bordignon and Turati, 2009, Sorribas-Navarro, 2011) the real scope of the externality is not the population size but the extent to which SNGs provide key public services such as health, education or social services. Third, regions may be "too financially weak to fail" when large vertical imbalances exist.…”

Section: The Role Of Bailout Expectationsmentioning

confidence: 99%

Passing the Buck? Central and Sub-national Governments in Times of Fiscal Stress

Ahrend

Curto‐Grau

Vammalle

2013

OECD Regional Development Working Papers

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“…At the beginning of the 1990s, the health system was facing a de…cit of about 15% in small regions in Italy 1 . Following the constitutional principle that guarantees citizens access to the same quality of services, the central government stepped in and covered the de…cits thus incurred to prevent health care in these regions break down (von Hagen et al, 2000). In Sweden, the central government was empowered by law during the period 1974-1992, to provide discretionary transfers to support municipalities in …nancial distress 2 .…”

Section: Introductionmentioning

confidence: 99%

Size, spillovers and soft budget constraints

Crivelli

Staal

2012

Int Tax Public Finance

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There is much evidence against the so-called "too big to fail" hypothesis in the case of bailouts to subnational governments. We look at a model where districts of di¤erent size provide local public goods with positive spillovers. Matching grants of a central government can induce socially-e¢ cient provision, but districts can still exploit the intervening central government by inducing direct …nancing. We show that the ability and willingness of a district to induce a bailout and district size are negatively correlated. We also discuss the e¤ect economies of scale in local public goods provision has on the bailout policies and argue that these policies can be subgame perfect equilibrium strategies.

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Subnational Government Bailouts in OECD Countries: Four Case Studies

Cited by 39 publications

References 8 publications

The Dilemma of Fiscal Federalism: Grants and Fiscal Performance around the World

The Dilemma of Fiscal Federalism: Grants and Fiscal Performance around the World

Passing the Buck? Central and Sub-national Governments in Times of Fiscal Stress

Size, spillovers and soft budget constraints

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