Is centralization a solution to the soft budget constraint problem?

Avi Ben-Bassat, Momi Dahan, Esteban F. Klor*

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

22 Scopus citations

Abstract

This paper focuses on the centralization program implemented in Israel in 2004 to analyze whether the administrative subordination of municipalities is an effective policy to deal with problems related to soft-budget constraint of lower level governments. The results consistently show, for different specifications and samples of municipalities, that this program brought a substantial decrease of municipalities’ expenditures (mostly because of decreases in salary payments), and an increase of local property tax collection. Our analysis shows that all of the fiscal impact of the program is due to the appointment of an accountant that reports directly to the central government, a relatively mild form of administrative subordination. In contrast, more intrusive forms of subordination, like the central imposition of a recovery program, do not result in any substantial improvement of municipalities’ fiscal situation. This leads us to conclude that a mild form of administrative subordination is an effective tool to cope with problems related to soft-budget constraints, whereas political subordination is not an effective tool to reach that goal.

Original languageAmerican English
Pages (from-to)57-75
Number of pages19
JournalEuropean Journal of Political Economy
Volume45
DOIs
StatePublished - 1 Dec 2016

Bibliographical note

Publisher Copyright:
© 2016 Elsevier B.V.

Keywords

  • Bailout program
  • Centralization
  • Hierarchical subordination
  • Local government
  • Political institutions
  • Soft budget constraints

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