Decentralization and the Challenge of Hard Budget Constraints

Since the early 1980s fiscal and political decentralization have spread around the world. But decentralization can encourage dangerous opportunistic behavior by state and local officials. Left unrestricted, such opportunism can undermine macroecono...

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Bibliographic Details
Main Author:	Rodden, Jonathan
Format:	Brief
Language:	English
Published:	World Bank, Washington, DC 2012
Subjects:	DECENTRALIZATION IN GOVERNMENT BUDGETS SUBNATIONAL GOVERNMENT FINANCIAL INSTITUTIONS ACCOUNTABILITY ACCOUNTING ACCOUNTING PRINCIPLES ASSETS AUDITING AUTHORITY BANKRUPTCY BANKRUPTCY LAWS BANKRUPTCY PROCEDURES BORROWING CAPITAL MARKETS CENTRAL BANKS CENTRAL GOVERNMENT CENTRAL GOVERNMENTS CITIZENS COALITIONS CREDIT MARKETS CREDIT RATINGS DEBT DECENTRALIZATION DEFICITS DEMOCRACY EMPLOYMENT FEDERALISM FINANCIAL CRISIS FINANCIAL INSTITUTIONS FISCAL FISCAL DECENTRALIZATION FISCAL DISCIPLINE FISCAL FEDERALISM FISCAL PERFORMANCE FISCAL RESPONSIBILITY GOVERNMENT CONTROLS GOVERNMENT PERFORMANCE HARD BUDGET CONSTRAINTS INSTITUTIONAL MECHANISMS INTERGOVERNMENTAL TRANSFERS LEGISLATION LEGISLATURE LOCAL AUTONOMY LOCAL GOVERNMENT LOCAL GOVERNMENTS LOCAL REVENUE LOCAL SPENDING LOCAL TAX MACROECONOMIC STABILITY MARKET DISCIPLINE POLITICAL INSTITUTIONS POLITICIANS PRESIDENCY PRIVATIZATION PUBLIC GOODS PUBLIC SECTOR PUBLIC SECTOR EFFICIENCY SOFT BUDGET CONSTRAINTS STATE ENTERPRISES SUBNATIONAL GOVERNMENTS TAX ADMINISTRATION TRANSITION ECONOMIES TRANSPARENCY
Online Access:	http://documents.worldbank.org/curated/en/2000/07/828347/decentralization-challenge-hard-budget-constraints http://hdl.handle.net/10986/11426

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Summary:	Since the early 1980s fiscal and political decentralization have spread around the world. But decentralization can encourage dangerous opportunistic behavior by state and local officials. Left unrestricted, such opportunism can undermine macroeconomic stability and other objectives. The most pressing manifestation of this problem is the softening of subnational budget constraints. The impact of decentralization on public sector efficiency and macroeconomic stability depends on a country's ability to prevent lower-level governments from passing on their liabilities to higher-level governments. This note draws on 11 countries to identify institutional factors associated with hard and soft budget constraints and extract policy lessons for other countries.

Decentralization and the Challenge of Hard Budget Constraints

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