Baskaran, Thushyanthan (2011): Soft budget constraints and strategic interactions in subnational borrowing: Evidence from the German States, 1975-2005. Forthcoming in: Journal of Urban Economics
Download (320kB) | Preview
Cooperative federations are usually characterized by the existence of bailout guarantees and intergovernmental transfer schemes. This paper explores whether such features of cooperative federations lead to subnational soft budget constraints using panel data from the German States covering the 1975-2005 period. The methodology is based on the premise that subnational governments' borrowing will exhibit vertical and horizontal strategic interactions if they operate under soft budget constraints. Therefore, a test for strategic interactions in subnational borrowing can be used to infer whether a cooperative federation like Germany is susceptible to soft budget constraints. The results suggest that state borrowing in Germany exhibited horizontal but not vertical interactions during the time-frame of the analysis. This indicates (i) that German States faced soft budget constraints and (ii) that they were more concerned about the likelihood of a bailout than about its volume.
|Item Type:||MPRA Paper|
|Original Title:||Soft budget constraints and strategic interactions in subnational borrowing: Evidence from the German States, 1975-2005|
|Keywords:||Fiscal federalism; Soft budget constraints; Strategic fiscal interactions|
|Subjects:||H - Public Economics > H7 - State and Local Government; Intergovernmental Relations > H77 - Intergovernmental Relations; Federalism; Secession
H - Public Economics > H3 - Fiscal Policies and Behavior of Economic Agents > H30 - General
H - Public Economics > H7 - State and Local Government; Intergovernmental Relations > H74 - State and Local Borrowing
|Depositing User:||Thushyanthan Baskaran|
|Date Deposited:||02. Aug 2011 01:37|
|Last Modified:||12. Feb 2013 21:59|
Akai, N. and M. Sato (2008). Too big or too small? A synthetic view of the commitment problem in interregional transfers. Journal of Urban Economics 64 (3), 551–559.
Baicker, K. (2005). The spillover effects of state spending. Journal of Public Economics 89 (2-3), 529–544.
Baskaran, T. (2010). On the link between fiscal decentralization and public debt in OECD countries. Public Choice 145 (3), 351–378.
Besley, T. and A. Case (1995). Incumbent behavior: vote-seeking, tax setting, and yardstick competition. American Economic Review 85 (1), 25–45.
Blankart, C. B. and A. Klaiber (2006). Subnational government organization and public debt crisis. Economic Affairs 26 (3), 48–54.
Breuille, M.-L. and M. Vigneault (2010). Overlapping soft budget constraints. Journal of Urban Economics 67 (3), 259–269.
Brueckner, J. (2003). Strategic interaction among governments: An overview of empirical studies. International Regional Science Review 26 (2), 175–188.
Case, A. C., H. Rosen, and J. Hines (1993). Budget spillovers and fiscal policy interdependence: evidence from the states. Journal of Public Economics 52 (3), 285–307.
Crivelli, E. and K. Staal (2008). Size, spillovers and soft budget constraints. Max Planck Institute for Research on Collective Goods Working Paper.
De Mello, L. R. (2000). Fiscal decentralization and intergovernmental fiscal relations: a cross country analysis. World Development 28 (2), 365–380.
Devereux, M. P., B. Lockwood, and M. Redoano (2008). Do countries compete over corporate tax rates? Journal of Public Economics 92 (5-6), 1210–1235.
Dillinger, W. R. and S. B. Webb (1999). Fiscal Management in Federal Democracies: Argentina and Brazil. World Bank Policy Working Paper 2121.
http://www-wds.worldbank.org/servlet/WDSContentServer/WDSP/IB/1999/09/14/000094946_990 Doi, T. and T. Ihori (2006). Soft budget constraints and local expenditures. CIRJE Discussion Paper No. F-442. http://www.e.u-tokyo.ac.jp/cirje/research/dp/2006/2006cf422.pdf.
Edmark, K. and H. Agren (2008). Identifying strategic interactions in Swedish local income tax policies. Journal of Urban Economics 63 (3), 849–857.
Federal Ministry of Finance (2009). Federation/Länder financial relations on the basis of constitutional financial provisions.
Feld, L. P. and G. Kirchgässner (2007). On the effectiveness of debt brakes: the Swiss experience. In R. Neck and J.-E. Sturm (Eds.), Sustainability of public debt, Cambridge/ London. MIT Press.
Goodspeed, T. J. (2002). Bailouts in a federation. International Tax and Public Finance 9 (4), 409–421.
Häde, U. (2007). Das Urteil des Bundesverfassungsgerichts zur Berliner Haushaltslage. In K. A. Konrad and B. Joachimsen (Eds.), Der F¨oderalstaat nach dem Berlin-Urteil. Berlin: Peter Lang.
Inman (2003). Transfers and bailouts: institutions for enforcing local fiscal discipline with lessons from US federalism. In J. Rodden, G. Eskeland, and J. Litvack (Eds.), Fiscal decentralization and the challenge of hard budget constraints. Washington D. C.: World Bank.
Judson, R. A. and A. L. Owen (1999). Estimating dynamic panel data models: a guide for macroeconomists. Economics Letters 65 (1), 9–15.
Landon, S. and C. E. Smith (2000). Government debt spillovers and creditworthiness in a federation. Canadian Journal of Economics 33 (3), 634–661. Nickell, S. J. (1981). Biases in dynamic models with fixed effects. Econometrica 49 (6), 1417–1426.
Pettersson-Lidbom, P. and M. Dahlberg (2005). An empirical approach for estimating the causal effect of soft budget constraints on economic outcomes. Mimeo, Stockholm University.
Pitlik, H., F. Schneider, and H. Strotmann (2005). Legislative malapportionment and the politicization of Germany’s intergovernmental transfer system. Mimeo (University of Hohenheim).
Qian, Y. and G. Roland (1998). Federalism and the soft budget constraint. American Economic Review 88 (5), 1143–1162.
Rodden, J. (2000). Breaking the Golden Rule: fiscal behaviour with rational bailout expectations in the German States. Mimeo (Paper prepared for theWorkshop: European Fiscal Federalism in Comparative Perspective, Center for European Studies, Harvard University).
Rodden, J. (2002). The dilemma of fiscal federalism: grants and fiscal performance around the world. American Journal of Political Science 46 (3), 670–687.
Rodden, J. (2005). And the last shall be first: federalism and soft budget constraints in Germany. Mimeo (Massachusetts Institute of Technology). http://web.mit.edu/jrodden/www/materials/germany.june2005.pdf.
Roodman, D. (2008). How to do xtabond2: An introduction to ”Difference” and ”System” GMM in Stata. Center for Global Development Working Paper.
Salmon, P. (1987). Decentralization as an incentive scheme. Oxford Review of Economic Policy 3 (2), 24–43.
Samuels, D. (2003). Fiscal straightjacket: the politics of macroeconomic reform in Brazil, 1995-2002. Journal of Latin American Studies 35, 545–569.
Schaltegger, C. and L. P. Feld (2009). Are fiscal adjustments less successful in decentralized governments? European Journal of Political Economy 25 (1), 115–123.
Seitz, H. (1999). Subnational government bailouts in Germany. ZEI Working Paper No. B 20. http://www.zei.de/download/zei_wp/B99-20.pdf. Watts, R. L. and P. Hobson (2000). Fiscal federalism in Germany. Mimeo (Queens University and Acadia University).
Weingast, B. (2009). Second generation fiscal federalism: The implications of fiscal incentives. Journal of Urban Economics 65 (3), 279–293.
Wildasin, D. (1997). Externalities and bailouts: hard and soft budget constraints in intergovernmental fiscal relations. World Bank Policy Research Working Paper No. 1843.