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Crivelli, Ernesto and Staal, Klaas (October 2006): Size and soft budget constraints. SFB/TR 15 Discussion Paper No. 172 [PDF, 239kB]


There is much evidence against the so-called "too big to fail" hypothesis in the case of bailouts to sub-national governments. We look at a model where districts of different size provide local public goods with positive spillovers. Matching grants of a central government can induce socially-efficient provision, but districts can still exploit the intervening central government by inducing direct financing. We show that the ability of a district to induce a bailout from the central government and district size are negatively correlated.

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