IREF - Institute for Research in Economic and Fiscal issues
Fiscal competition and economic freedom
WP 2012-01. Executive Summary
Update: The paper was published in 2013 as "Grant legislation vs. political factors as determinants of soft budget spending behaviors. Comparison between Italian and French regions" in The European Journal of Comparative Economics.
This paper analyses intergovernmental transfers in France and Italy to assess how soft budget spending behaviors may result from slacks in institutional constraints or from phenomena related to political culture, like administrative practices or implementation of rules.
It innovates on the previous literature, which concentrated on single countries, by adopting a comparative perspective.
We estimate two separate but identical autoregressive forecasting models on French and Italian data to evaluate the extent to which regional administrators of each country can expect to be bailed out given the fiscal rules and institutions they face.
This allows to proxy the bailout expectations in both countries and their role in determining soft budget spending behaviors.
A larger impact of expectations is taken as evidence of greater discretion in fiscal decisions over and beyond the formal fiscal rules in place, evincing a more
lax political culture.
The estimates indicate that soft budget constraints and bailing out expectations are a quantitatively important component of local government spending in both countries, regardless the different degrees of stringency of fiscal rules and the type of grants
and expenditures (total, current and capital) examined.
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