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El trimestre económico
versión On-line ISSN 2448-718Xversión impresa ISSN 0041-3011
Resumen
MORALES SANCHEZ, Elmar. Bailouts and soft budget constraint in a context of incomplete fiscal decentralization. El trimestre econ [online]. 2019, vol.86, n.341, pp.145-178. Epub 28-Ago-2020. ISSN 2448-718X. https://doi.org/10.20430/ete.v86i341.675.
Background
In the area of intergovernmental fiscal relations, some studies attribute the problem of soft budget constraint to positive externalities that derive from jurisdictional provision of public goods. The present study explores how the problem of soft budget constraint can also arise when incomplete fiscal decentralization is combined with divergent fiscal policies of the central and local governments.
Methodology
We construct a model in which each level of government is assigned a fiscal-behavior function that responds to three possibilities. Based upon that model, we formalize a dynamic, non-cooperative game of fiscal competition between the two levels of government. We then determine the combination of policies that constitute the model’s equilibrium.
Results
We show that budget constraint softens when incomplete fiscal decentralization is combined with opposing fiscal policies at the local and central levels of government. In addition, the vicious circle of fiscal irresponsibility and bailouts of local governments is a Nash equilibrium.
Conclusions
In economies with strong fiscal imbalances, and in which an efficient (i.e. complete) decentralization cannot be carried out, soft budget constraint becomes a significant moral-hazard problem that inevitably degrades a nation’s societal well-being.
Palabras llave : incomplete fiscal decentralization; soft budget constraint; bailout; Nash equilibrium.