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Publicado en: Artículo en revista académica

Bailouts in Federations: is a Hard Budget Constraint Always Best?

Martín Besfamille; Ben Lockwood.

International Economic Review, 49(2): 577-593, 2008.

This article analyses hard and soft budget constraints in a federation, where there is a moral hazard problem between the central and the regional governments. Regional governments can avoid a bailout from the center by exerting costly effort. In this setting, a hard budget constraint is not always optimal because it can provide excessive incentives for high effort, and thus discourage investment that is socially efficient. Thus, a hard budget constraint can imply the opposite kind of inefficiency that emerges under a soft budget constraint, where the common pool problem can give rise to inefficiently low effort and overinvestment.

 

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