American Economic Journal:
Economic Policy
ISSN 1945-7731 (Print) | ISSN 1945-774X (Online)
Dynamic Commitment and the Soft Budget Constraint: An Empirical Test
American Economic Journal: Economic Policy
(pp. 154–79)
Abstract
This paper develops an empirical framework for the problem of soft budgets which is explicitly based on a dynamic commitment problem, i.e., the inability of a supporting organization to commit itself not to extend more resources ex post to a budget-constrained organization than it was prepared to provide ex ante. Swedish local governments are used as a testing ground since the central government distributed a large number of fiscal transfers. The estimated soft-budget effect is economically significant: on average, a local government increases its debt by more than 20 percent by going from a hard to a soft budget constraint. (JEL D82, G32, L32)Citation
Pettersson-Lidbom, Per. 2010. "Dynamic Commitment and the Soft Budget Constraint: An Empirical Test." American Economic Journal: Economic Policy 2 (3): 154–79. DOI: 10.1257/pol.2.3.154Additional Materials
JEL Classification
- D82 Asymmetric and Private Information
- G32 Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure
- L32 Public Enterprises; Public-Private Enterprises