DEBT BAILOUTS AND CONSTITUTIONS

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By this: publisher
In this Subject: Economics
By this author: KOHLSCHEEN, EMANUEL

Author: KOHLSCHEEN, EMANUEL

Source: Economic Inquiry, Volume 46, Number 3, July 2008 , pp. 480-492(13)

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Abstract:

A demand-based theory of subnational debt bailouts is presented. It is shown that demand for bailouts among politicians with regional constituencies is affected by revenue sharing arrangements as a bailout implies a shift of taxation toward the federal tier. Automatic revenue sharing may lead to the formation of pro-bailout coalitions formed by indebted states and states that are net recipients of the revenue sharing arrangement. The model shows that the state debt bailouts approved by the Brazilian Senate prior to the enactment of the Fiscal Responsibility Act were consistent with politicians who maximize the proceeds accruing to their constituencies. (JEL H70, D70)

Document Type: Research article

DOI: http://dx.doi.org/10.1111/j.1465-7295.2007.00102.x

Publication date: 2008-07-01