Budget deficits as devices for appropriating extra funds: An investigation of sharing rules
2002/11: by Sverre Grepperud, Center for Health Administration & HERO (PDF 129 kb)
This paper considers a model with a sponsor and several bureaus to analyse the role of sharing rules. Various incentives for budget overspending are identified; among them the overspending of budgets due to soft budget constraints. Four different sharing rules are also considered that differ with respect to their strategic properties and whether the share is exogenous or endogenous.
The results show that sharing on the basis of egalitarian principles yields a lower budget deficit than sharing based upon relative deficits both in symmetric and asymmetric games. The ranking of deficits that follow from sharing based upon relative budgets and sharing that equalises ex-post debt ratios is shown to depend on the properties of the health production function.