State Capacity and the Soft Budget Constraint: Fiscal Federalism, Indian Style

2020 ◽  
Author(s):  
Pradyumn Tripathi ◽  
Theocharis Grigoriadis
Keyword(s):  
Fiscal Federalism ◽  
State Capacity ◽  
Budget Constraint ◽  
Soft Budget Constraint

Public Finance and Soft Budgets

2018 ◽  
Author(s):  
Rosella Levaggi
Keyword(s):  
Local Governments ◽  
Fiscal Federalism ◽  
Strategic Behavior ◽  
The United States ◽  
Policy Instrument ◽  
Budget Constraint ◽  
Public Hospitals ◽  
Public Healthcare ◽  
Fiscal Competition ◽  
Soft Budget Constraint

The concept of soft budget constraint, describes a situation where a decision-maker finds it impossible to keep an agent to a fixed budget. In healthcare it may refer to a (nonprofit) hospital that overspends, or to a lower government level that does not balance its accounts. The existence of a soft budget constraint may represent an optimal policy from the regulator point of view only in specific settings. In general, its presence may allow for strategic behavior that changes considerably its nature and its desirability. In this article, soft budget constraint will be analyzed along two lines: from a market perspective and from a fiscal federalism perspective. The creation of an internal market for healthcare has made hospitals with different objectives and constraints compete together. The literature does not agree on the effects of competition on healthcare or on which type of organizations should compete. Public hospitals are often seen as less efficient providers, but they are also intrinsically motivated and/or altruistic. Competition for quality in a market where costs are sunk and competitors have asymmetric objectives may produce regulatory failures; for this reason, it might be optimal to implement soft budget constraint rules to public hospitals even at the risk of perverse effects. Several authors have attempted to estimate the presence of soft budget constraint, showing that they derive from different strategic behaviors and lead to quite different outcomes. The reforms that have reshaped public healthcare systems across Europe have often been accompanied by a process of devolution; in some countries it has often been accompanied by widespread soft budget constraint policies. Medicaid expenditure in the United States is becoming a serious concern for the Federal Government and the evidence from other states is not reassuring. Several explanations have been proposed: (a) local governments may use spillovers to induce neighbors to pay for their local public goods; (b) size matters: if the local authority is sufficiently big, the center will bail it out; equalization grants and fiscal competition may be responsible for the rise of soft budget constraint policies. Soft budget policies may also derive from strategic agreements among lower tiers, or as a consequence of fiscal imbalances. In this context the optimal use of soft budget constraint as a policy instrument may not be desirable.

scholarly journals Are voters fiscal conservatives? Evidence from Brazilian municipal elections

2010 ◽  
Vol 40 (1) ◽  
pp. 67-101 ◽  
Author(s):  
Paulo Roberto Arvate ◽  
Marcos Mendes ◽  
Alexandre Rocha
Keyword(s):  
Fiscal Federalism ◽  
Probit Model ◽  
Institutional Context ◽  
Budget Constraint ◽  
Soft Budget Constraint ◽  
Present Evidence ◽  
Municipal Elections ◽  
Low Level ◽  
Different Levels ◽  
2000 Election

Some papers in literature show that voters are fiscal conservatives, while others find evidence of a preference for fiscal profligacy. We use a traditional Probit model to analyze the preference of Brazilian municipal voters in the 2000 election. The main result suggests that voters prefer greater expenditure. We present evidence that this result is a consequence of a fiscal federalism model where there is a soft budget constraint for municipalities (institutional context). Moreover, we obtained evidence that voters with different levels of schooling impose a different result on expenditure. The effect of expenditure is more marked in municipalities with a low level of literacy.

scholarly journals Institutional Design and Implicit Incentives in Bolivia's Decentralization Model

2013 ◽  
pp. 137-211
Author(s):  
Gover Barja Daza ◽  
Sergio Villarroel Böhrt ◽  
David Zavaleta Castellón
Keyword(s):  
Fiscal Federalism ◽  
Institutional Design ◽  
National Level ◽  
Budget Constraint ◽  
Soft Budget Constraint ◽  
High Tendency ◽  
Fiscal Risk ◽  
Fiscal Imbalance ◽  
Regional Interests ◽  
Municipal Level

The second generation fiscal federalism (SGFF) approach is used as a reference to analyze the political and fiscal institutional design of Bolivia’s decentralization model and its evolution. Subnational public finance data up to 2008 is used to verify that decentralization of expenditure was higher than that of revenue, establishing a context of vertical fiscal imbalance that increased due to growing fiscal transfers during the positive external shock (boom) period. Consequently, the subnational fiscal surplus was not a result of internal efficiency but of excess revenues from such transfers. Panel models were estimated to identify and assess the implicit incentives embedded in fiscal institutions of the decentralization model.Findings at the municipal level are: i) misalignment of local spending with local interestsdue to dominance of transfers over own revenue (dominance of central governmentdevelopment policies); ii) incentive to spend transfers faster than own revenue (flypaper effect); iii) greater marginal contribution of own revenue to positive fiscal balances comparedto transfers, thus introducing the seed for a soft budget constraint but hidden by the fiscalsurplus; iv) disincentive to generate own revenue (tax and non-tax) due to the size and growthof transfers (disincentive to the culture of contributing to own revenue). Findings at the prefectural1level are: i) misalignment with regional interests given the dominance of transfers over own revenue due to absolute lack of tax powers (until 2009); ii) high tendency to a soft budget constraint and, eventually, also fiscal bail-out, hidden by the fiscal surplus; iii) in only two departments collection of national-level taxes were higher, compared to transfers received in the same departments; iv) disincentive to pay the VAT (national-level tax) due to higher royalty transfers received, an effect not extended to other national-level taxes; v) high dependence from hydrocarbon-based transfers, and fiscal risk when this natural resource declines (both in volume and prices) due to volatility of international oil prices. Also, as a result of the decentralization model a positive and significant impact was found on education-coverage indicators, an important development objective of the national government.

scholarly journals Central banks: Hesitant guardians of equilibrium

2018 ◽  
Vol 68 (s1) ◽  
pp. 125-139
Author(s):  
Jerzy Hausner ◽  
Andrzej Sławiński
Keyword(s):  
Monetary Policy ◽  
Best Practice ◽  
Financial System ◽  
Central Banks ◽  
Budget Constraint ◽  
Soft Budget Constraint ◽  
Intellectual Heritage ◽  
Inherent Tendency

In our paper we focus on situations when central banks have to conduct monetary policy in a world in which they cannot rely fully on what is regarded the best practice and they have to cope with financial system inherent tendency to be unstable. Both phenomena are rooted in János Kornai’s intellectual heritage highlighting that economy tends to divert from equilibrium and that soft budget constraint erodes economic actors’ behavior.

Innovation in centralized organizations: examining evidence from Soviet Russia

2014 ◽  
Vol 41 (1) ◽  
pp. 123-139 ◽  
Author(s):  
Dmitriy Chulkov
Keyword(s):  
Decision Making ◽  
Empirical Evidence ◽  
Budget Constraint ◽  
Soviet Economy ◽  
Decision Makers ◽  
Economic Systems ◽  
Soft Budget Constraint ◽  
Content Type ◽  
Economic Decision Making ◽  
Constraint Model

Purpose – This study aims to examine the economic factors that determine innovation pattern in centralized and decentralized economies and organizations. Design/methodology/approach – Empirical evidence on innovation in the centralized economy of the Soviet Union is reviewed. Existing theoretical literature in this area relies on the incentives of decision-makers in centralized organizations and on the concept of soft budget constraint in centralized command economies and hard budget constraint in market economies. This study advocates applying the hierarchy/polyarchy model of innovation screening to explain the pattern of innovation in centralized economic systems. Findings – Screening and development of innovation projects can be organized in a centralized or decentralized fashion. The differences in innovation between centralized and decentralized economic systems may be explained by elements of the principal-agent theory, the soft budget constraint model, and the theory of decision-making in hierarchies and polyarchies. Empirical evidence shows a sharp slowdown in both innovation and economic growth in the Soviet economy following the economic decision-making reform of 1965. The theoretical explanation most consistent with this evidence is the hierarchy decision-making model. Originality/value – Comparisons of innovation in centralized and decentralized economies traditionally relied on decision-makers' incentives and the concept of soft budget constraint. Upon analysis of empirical evidence from the centralized Soviet economy, this study advocates explaining innovation patterns based on decision-making theory of hierarchy.

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