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)
"Dynamic Commitment and the Soft Budget Constraint: An Empirical Test."
American Economic Journal: Economic Policy,
Asymmetric and Private Information
Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure
Public Enterprises; Public-Private Enterprises