Fiscal decentralization, regional inequality and bail-outs: Lessons from Brazil's debt crisis

摘要: Abstract This paper develops a simple two-period model of public good provision within federation. A national is provided to both states by the federal government, while local supplied each state government. The government levies proportional income tax, and in period governments receive share revenues collected equal amount needed finance first best good. In can also use borrowing good, but any debt contracted must be repaid second period. We show that when face hard budget constraint, they do not find it optimal increase above level guaranteed grant. However, if cannot credibly commit bail-out states, then may borrow order Furthermore, we commitment problem more likely arise vis-a-vis whose default results negative externality on Hence, those are carry deficits benefit from bail-out.