Fiscal Decentralization, Endogenous Policy Burden And Soft Budget Constraint: Theory And Policy Analysis

Soft budget constraint is an important topic in the economic developing and restructuring. In this paper, the author adds the opportunity cost of the government bailout to the classic DM model, in order to endogenize the policy burdens. From the perspective of opportunity cost, the author finds that that the difference of soft budget constraint extents should be attributed to the difference of project qualities in various provinces. On the other hand, through comparing the social burdens and the policy burdens, the author claims that the strategic policy burden furthers the hardening of budget constraint in local governments. The author then comes up with a few politic suggestions.