Since 2014
Subnational Debt Renegotiation and Elections: Experimentation and Reputation in the Brazilian Fiscal Federalism
Brazilian Review of Econometrics
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| Title |
Subnational Debt Renegotiation and Elections: Experimentation and Reputation in the Brazilian Fiscal Federalism
Subnational Debt Renegotiation and Elections: Experimentation and Reputation in the Brazilian Fiscal Federalism |
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| Creator |
Bugarin, Maurício Soares; Departamento de Economia, Universidade de Brasília, ICC Norte, Asa Norte, 60910-900, Brasília, DF
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| Description |
The present paper analyzes the effect of elections on subnational fiscal policy after debt renegotiations between local (state) governments and the Federal government. First, a stylized model determines under which conditions a state will accept the debt renego- tiation requirements and highlights an incentive for the state to reduce tax effort after renegotiation. Next, a dynamic model shows that elections bring about new incentives for nonpayment of debt interests to the Federal government. The model’s solution yields two perfect Bayesian equilibria. In the first “experimentation equilibrium” new state governors decide to stop payment of debt interests in order to test the Federal govern- ment’s willingness to get involved in a politically costly confrontation. In the second “reputation equilibrium” the Federal government decides to withhold federal transfers to any defaulting state, in spite of the high political cost of that decision, in order to avoid defaulting by other states in the future.
The present paper analyzes the effect of elections on subnational fiscal policy after debt renegotiations between local (state) governments and the Federal government. First, a stylized model determines under which conditions a state will accept the debt renego- tiation requirements and highlights an incentive for the state to reduce tax effort after renegotiation. Next, a dynamic model shows that elections bring about new incentives for nonpayment of debt interests to the Federal government. The model’s solution yields two perfect Bayesian equilibria. In the first “experimentation equilibrium” new state governors decide to stop payment of debt interests in order to test the Federal govern- ment’s willingness to get involved in a politically costly confrontation. In the second “reputation equilibrium” the Federal government decides to withhold federal transfers to any defaulting state, in spite of the high political cost of that decision, in order to avoid defaulting by other states in the future. |
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| Publisher |
Sociedade Brasileira de Econometria
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| Date |
2006-05-01
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| Type |
info:eu-repo/semantics/article
info:eu-repo/semantics/publishedVersion — — |
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| Format |
application/pdf
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| Identifier |
http://bibliotecadigital.fgv.br/ojs/index.php/bre/article/view/2498
10.12660/bre.v26n12006.2498 |
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| Source |
Brazilian Review of Econometrics; Vol 26, No 1 (2006); 67-104
Brazilian Review of Econometrics; Vol 26, No 1 (2006); 67-104 1980-2447 |
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| Language |
eng
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| Relation |
http://bibliotecadigital.fgv.br/ojs/index.php/bre/article/view/2498/1481
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