Public Finance and Soft Budgets

2018 ◽  
Author(s):  
Rosella Levaggi
Keyword(s):  
Local Governments ◽  
Fiscal Federalism ◽  
Strategic Behavior ◽  
The United States ◽  
Policy Instrument ◽  
Budget Constraint ◽  
Public Hospitals ◽  
Public Healthcare ◽  
Fiscal Competition ◽  
Soft Budget Constraint

The concept of soft budget constraint, describes a situation where a decision-maker finds it impossible to keep an agent to a fixed budget. In healthcare it may refer to a (nonprofit) hospital that overspends, or to a lower government level that does not balance its accounts. The existence of a soft budget constraint may represent an optimal policy from the regulator point of view only in specific settings. In general, its presence may allow for strategic behavior that changes considerably its nature and its desirability. In this article, soft budget constraint will be analyzed along two lines: from a market perspective and from a fiscal federalism perspective. The creation of an internal market for healthcare has made hospitals with different objectives and constraints compete together. The literature does not agree on the effects of competition on healthcare or on which type of organizations should compete. Public hospitals are often seen as less efficient providers, but they are also intrinsically motivated and/or altruistic. Competition for quality in a market where costs are sunk and competitors have asymmetric objectives may produce regulatory failures; for this reason, it might be optimal to implement soft budget constraint rules to public hospitals even at the risk of perverse effects. Several authors have attempted to estimate the presence of soft budget constraint, showing that they derive from different strategic behaviors and lead to quite different outcomes. The reforms that have reshaped public healthcare systems across Europe have often been accompanied by a process of devolution; in some countries it has often been accompanied by widespread soft budget constraint policies. Medicaid expenditure in the United States is becoming a serious concern for the Federal Government and the evidence from other states is not reassuring. Several explanations have been proposed: (a) local governments may use spillovers to induce neighbors to pay for their local public goods; (b) size matters: if the local authority is sufficiently big, the center will bail it out; equalization grants and fiscal competition may be responsible for the rise of soft budget constraint policies. Soft budget policies may also derive from strategic agreements among lower tiers, or as a consequence of fiscal imbalances. In this context the optimal use of soft budget constraint as a policy instrument may not be desirable.

scholarly journals Empirical Analysis of the Driving Factors of China’s ‘Land Finance’ Mechanism Using Soft Budget Constraint Theory and the PLS-SEM Model

2019 ◽  
Vol 11 (3) ◽  
pp. 742 ◽  
Author(s):  
Xinhua Zhu ◽  
Yigang Wei ◽  
Yani Lai ◽  
Yan Li ◽  
Sujuan Zhong ◽  
...  
Keyword(s):  
Economic Development ◽  
Local Governments ◽  
Driving Forces ◽  
Fiscal Decentralization ◽  
Budget Constraint ◽  
Driving Factors ◽  
Equation Modeling ◽  
Soft Budget Constraint ◽  
Land Transfer ◽  
Constraint Theory

“Land finance” refers to the key fiscal strategy in which local governments in China generate revenue through land grant premiums and land tax revenues. A burgeoning body of literature has focused on the driving factors of China’s land finance from different aspects including fiscal decentralization, revenue decentralization, competition among local governments, land marketization, infrastructure development, and economic development. However, little research has provided a comprehensive perspective integrating social, economic and institutional aspects to investigate the driving forces of these unique and profound issues in China. This study aims to investigate the driving factors and working mechanism of land finance. A theoretical and empirical model was proposed using soft budget constraint theory and least squares structural equation modeling (PLS-SEM). The panel data of 35 Chinese major cities were assessed between 2006 and 2015. The empirical results contend the following: (1) the land transfer and fiscal systems provide the key impetus for land financing because the land transfer system forms a stable modality, and the fiscal system is an important incentive for land financing; (2) the effects of the economic development and political system are insignificant; and (3) the political and land systems significantly influence economic development. Our contributions focus on two aspects. Firstly, a comprehensive framework of factors germane to land finance is constructed. Secondly, a new research methodology for land use study is proposed. To the best of our knowledge, the current study is the first to employ the PLS-SEM method to delineate and verify the influence paths between multiple driving factors and land finance in different cities. Hence, research reliability can be improved.

scholarly journals Tension in New Zealand's Public Hospitals:  Performance Effects of Sharpening Incentives

2021 ◽  
Author(s):  
◽  
Adrian Slack
Keyword(s):  
Cost Control ◽  
Health Sector ◽  
Incomplete Contracts ◽  
Budget Constraint ◽  
Public Hospitals ◽  
Soft Budget Constraint ◽  
Corporate Structure ◽  
Non Profit ◽  
Performance Effects ◽  
Crown Health

<p>New Zealand's health sector reforms in the mid-1990s introduced corporate institutions and market disciplines to public hospitals. Yet the reorganisation of New Zealand's public hospitals into Crown Health Enterprises (CHEs) led to severe criticisms. Ultimately the CHEs were replaced with non-profit Hospital and Health Services. This thesis focuses on three major criticisms of the CHEs. We use game theory to provide a formal and novel analysis of interactions that could cause an organisation's performance to differ markedly from the reformers' expectations. The analysis explains how a stylised set of reforms could fail to achieve their objectives. Chapter 2 analyses public hospital throughput data over the reform period. We find that the CHE reforms were independently associated with an increase in hospitals' treatment costs. This chapter motivates the theoretical analyses of the three criticisms of the CHEs. We structure the theoretic analysis using an organisational hierarchy with four actors: a funder, an (hospital) administrator, a (medical) specialist and a (health) consumer. The first criticism was that CHE Boards paid bonuses despite managers failing to achieve performance targets. Chapter 3 examines when a funder may want to revise the budget of an organisation and to pay the administrator a bonus despite failing to meet a target. We introduce three features of the CHE reforms that conventional soft budget constraint models partly or entirely neglect: funder bargaining power, revisable targets and performance bonuses. A  flexible budget constraint paired with bonuses can be efficient in the light of uncertainty. The second criticism was that costs escalated despite strong managerial incentives for cost control. Chapter 4 argues that such incentives could disrupt trust in an organisation. We show that sharpening the administrator's incentives for cost control can create a misalignment between the administrator and the specialist and cause costs to escalate. Our result, that incentivising a measurable dimension of performance can worsen performance of that same task, contrasts with the conventional game-theoretic literature. The third criticism was that the reforms let doctors manipulate managers, resulting in inefficiency. The first model of Chapter 5 shows that an administrator might want to encourage a specialist to influence public opinion. We modify the first model to reflect a feature of the reforms: managerial efforts aimed at improving the organisation's operation. The administrator can damage a whistle-blower's credibility, to the detriment of specialists and patients. Both models give original insights into how the reforms could let an administrator take advantage of his role. In this multi-layered model, the administrator may intentionally reduce communication. The CHE reformers expected performance incentives to  flow through a corporate structure to improve efficiency. Rather than a cascade of beneficial incentives, incomplete contracts could cause unintentional negative interactions. Tension and perverse incentives could have caused costs to rise, necessitating budget revisions and additional bonus payments, while permitting administrators to silence whistle-blowers. This research shows how complex organisations that rely on soft information can benefit from systems that enhance trust and collaboration, and may be harmed by unhealthy tension.</p>

scholarly journals Hardening the budget constraint: Institutional reform in the financial management of Hungarian local governments

2020 ◽  
Vol 70 (4) ◽  
pp. 571-592
Author(s):  
Tamás Vasvári
Keyword(s):  
Financial Management ◽  
Local Governments ◽  
Central Government ◽  
Budget Constraint ◽  
Soft Budget Constraint ◽  
Fiscal Discipline ◽  
Financial Independence ◽  
Political Interests ◽  
The One ◽  
Negative Messages

AbstractKornai (2014) described the problems of municipal indebtedness in Hungary and analysed the process of bailout carried out between 2011 and 2014. In the same period, the central government also reformed the local government system, which included serious limitations of their financial independence. This study re-examines the state of the soft budget constraint (SBC) of Hungarian local governments. To start, the general theoretical framework of SBC is introduced. Then, the budget constraint on the Hungarian local governments before the bailout is described briefly, followed by an assessment of the corresponding measures which were expected to offset the negative messages of the completed bailout and to harden the budget constraint. The study concludes that the central government decided to harden the budget constraint through the introduction of new hierarchical mechanisms, while the development of fiscal discipline stopped. On the one hand, this resulted in the consolidation of municipal budgets, but on the other, it was accompanied by a serious limitation of local autonomy, projects and borrowing in general, while the central government employs specific administrative tools to show favour to some settlements according to its (political) interests.

scholarly journals Are voters fiscal conservatives? Evidence from Brazilian municipal elections

2010 ◽  
Vol 40 (1) ◽  
pp. 67-101 ◽  
Author(s):  
Paulo Roberto Arvate ◽  
Marcos Mendes ◽  
Alexandre Rocha
Keyword(s):  
Fiscal Federalism ◽  
Probit Model ◽  
Institutional Context ◽  
Budget Constraint ◽  
Soft Budget Constraint ◽  
Present Evidence ◽  
Municipal Elections ◽  
Low Level ◽  
Different Levels ◽  
2000 Election

Some papers in literature show that voters are fiscal conservatives, while others find evidence of a preference for fiscal profligacy. We use a traditional Probit model to analyze the preference of Brazilian municipal voters in the 2000 election. The main result suggests that voters prefer greater expenditure. We present evidence that this result is a consequence of a fiscal federalism model where there is a soft budget constraint for municipalities (institutional context). Moreover, we obtained evidence that voters with different levels of schooling impose a different result on expenditure. The effect of expenditure is more marked in municipalities with a low level of literacy.

scholarly journals Tension in New Zealand's Public Hospitals:  Performance Effects of Sharpening Incentives

2021 ◽  
Author(s):  
◽  
Adrian Slack
Keyword(s):  
Cost Control ◽  
Health Sector ◽  
Incomplete Contracts ◽  
Budget Constraint ◽  
Public Hospitals ◽  
Soft Budget Constraint ◽  
Corporate Structure ◽  
Non Profit ◽  
Performance Effects ◽  
Crown Health

<p>New Zealand's health sector reforms in the mid-1990s introduced corporate institutions and market disciplines to public hospitals. Yet the reorganisation of New Zealand's public hospitals into Crown Health Enterprises (CHEs) led to severe criticisms. Ultimately the CHEs were replaced with non-profit Hospital and Health Services. This thesis focuses on three major criticisms of the CHEs. We use game theory to provide a formal and novel analysis of interactions that could cause an organisation's performance to differ markedly from the reformers' expectations. The analysis explains how a stylised set of reforms could fail to achieve their objectives. Chapter 2 analyses public hospital throughput data over the reform period. We find that the CHE reforms were independently associated with an increase in hospitals' treatment costs. This chapter motivates the theoretical analyses of the three criticisms of the CHEs. We structure the theoretic analysis using an organisational hierarchy with four actors: a funder, an (hospital) administrator, a (medical) specialist and a (health) consumer. The first criticism was that CHE Boards paid bonuses despite managers failing to achieve performance targets. Chapter 3 examines when a funder may want to revise the budget of an organisation and to pay the administrator a bonus despite failing to meet a target. We introduce three features of the CHE reforms that conventional soft budget constraint models partly or entirely neglect: funder bargaining power, revisable targets and performance bonuses. A  flexible budget constraint paired with bonuses can be efficient in the light of uncertainty. The second criticism was that costs escalated despite strong managerial incentives for cost control. Chapter 4 argues that such incentives could disrupt trust in an organisation. We show that sharpening the administrator's incentives for cost control can create a misalignment between the administrator and the specialist and cause costs to escalate. Our result, that incentivising a measurable dimension of performance can worsen performance of that same task, contrasts with the conventional game-theoretic literature. The third criticism was that the reforms let doctors manipulate managers, resulting in inefficiency. The first model of Chapter 5 shows that an administrator might want to encourage a specialist to influence public opinion. We modify the first model to reflect a feature of the reforms: managerial efforts aimed at improving the organisation's operation. The administrator can damage a whistle-blower's credibility, to the detriment of specialists and patients. Both models give original insights into how the reforms could let an administrator take advantage of his role. In this multi-layered model, the administrator may intentionally reduce communication. The CHE reformers expected performance incentives to  flow through a corporate structure to improve efficiency. Rather than a cascade of beneficial incentives, incomplete contracts could cause unintentional negative interactions. Tension and perverse incentives could have caused costs to rise, necessitating budget revisions and additional bonus payments, while permitting administrators to silence whistle-blowers. This research shows how complex organisations that rely on soft information can benefit from systems that enhance trust and collaboration, and may be harmed by unhealthy tension.</p>

scholarly journals The Evolutionary Paradigm of Fiscal Federalism: Transformation of the United States Experience into Ukrainian Decentralism

2021 ◽  
Vol 8 (523) ◽  
pp. 109-116
Author(s):  
A. I. Krysovatyy ◽  
◽  
F. P. Tkachyk ◽  
Keyword(s):  
United States ◽  
United States Of America ◽  
Local Governments ◽  
Fiscal Federalism ◽  
Fiscal Decentralization ◽  
The United States ◽  
Public Authorities ◽  
Fiscal Autonomy ◽  
State And Local ◽  
States Experience

The modern paradigm of effective social and economic development of regions must take into consideration the dialectics of fiscal federalism in the symbiosis of its essential determinants with fiscal decentralization. The purpose of the article is to scientifically and conceptually substantiate the model of fiscal federalism of the United States of America in the field of implementation of adequate provisions into Ukrainian decentralization. The article examines the conceptual provisions of fiscal federalism, substantiates the forms of decentralization of powers among levels of government. The architectonics and evolutionary paradigm of fiscal federalism in the United States of America are covered. The risks and effects of fiscal federalism were monitored for the purposes of implementing its basic aspects into Ukrainian practice. Theories of the first and second generations of fiscal federalism are considered. It is ascertained, that the principles of fiscal federalism are used in the practice of unitary countries. Public authorities actively apply mechanisms of cooperation with municipalities in the context of delegation of tax and expenditure powers. Emphasis is placed on the tax component of the intensification of fiscal autonomy of local governments. At the same time, the experience of the United States of America has shown the importance of directing grants and transfers to social projects of municipalities. The priorities of adaptation of actual postulates of fiscal federalism into Ukrainian system of interbudgetary relations under conditions of decentralization of powers are outlined. It is emphasized that fiscal federalism should not be limited to the redistribution of financial resources between the State and local governments. It should encourage amalgamated territorial hromadas to financial autonomy and increase tax potential to improve the prosperity of citizens

Dynamic Commitment and the Soft Budget Constraint: An Empirical Test

2010 ◽  
Vol 2 (3) ◽  
pp. 154-179 ◽  
Author(s):  
Per Pettersson-Lidbom
Keyword(s):  
Local Governments ◽  
Central Government ◽  
Empirical Test ◽  
Budget Constraint ◽  
Soft Budget Constraint ◽  
Fiscal Transfers ◽  
Ex Post ◽  
Ex Ante ◽  
Commitment Problem ◽  
Empirical Framework

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)

scholarly journals FISCAL COMPETITION IN DEVELOPING COUNTRIES: A SURVEY OF THE THEORETICAL AND EMPIRICAL LITERATURE

2012 ◽  
Vol 03 (02) ◽  
pp. 1250013 ◽  
Author(s):  
THIERRY MADIÈS ◽  
JEAN-JACQUES DETHIER
Keyword(s):  
Developing Countries ◽  
Local Governments ◽  
Strategic Behavior ◽  
Empirical Literature ◽  
Fiscal Competition ◽  
Public Infrastructure ◽  
Fdi Inflows ◽  
Fiscal Incentives ◽  
Accelerated Depreciation ◽  
Tax Holidays

Fiscal competition between governments to attract investment can take the form of business tax rebates, productivity-enhancing public infrastructure, tax holidays, accelerated depreciation allowances or loss carry-forward for income tax purposes. This paper surveys the recent theoretical and empirical economic literature and deals with three issues. First, it examines if the theoretical literature on fiscal competition and bidding races contribute to a better understanding of these phenomena in developing countries. Second, it examines whether FDI inflows in developing countries are sensitive to fiscal incentives and if there is empirical evidence of strategic behavior by developing country governments in order to attract FDI. Finally, it reviews the literature's conclusions about fiscal competition among local governments in developing countries.

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