Evolving Federations and Regional Public Deficits : Testing the Bailout Hypothesis in the Spanish Case

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 deficit. There are many other factors affecting expectations and the real behavior of the agents involved: central government, subcentral governments, and the financial markets. Empirical research is the only means by which to determine the relevance of the bailout problem in each situation. To demonstrate this argument, the author describes an exhaustive analysis of the Spanish case. The main conclusion is that deficit seems to be better understood by a more traditional model of fiscal choices than by bailout expectations