High debt autonomy and low tax autonomy often characterize evolving federations, making the bailout hypothesis very attractive in resolving subcentral government deficits. However, meeting both conditions is not enough to conclude that bailout expectations are the main reason for a potential...

Uncertainty about the future preferences of the government may induce policy makers to run excessive budget deficits. As a solution to this problem, economists have proposed to impose a binding debt rule. In this paper we argue that a binding debt rule does not eliminate the distortions due to...