Overlapping soft budget constraints

Our paper identifies a potential problem with decentralization at a time when its virtues are widely extolled. We show that responsibility for equalization at multi-levels within a decentralized federation creates an overlapping equalization policy that can worsen fiscal discipline. Contrary to Qian and Roland (1998), we also show in our set-up that fiscal competition among regional rescuers does not act as a commitment device to harden the local budget constraint.