Scandinavian Working Papers in Economics

HERO Online Working Paper Series,
University of Oslo, Health Economics Research Programme

No 2002:11: Budget deficits as devices for appropriating extra funds: An investigation of sharing rules

Sverre Grepperud ()
Additional contact information
Sverre Grepperud: Institute of Health Management and Health Economics, Postal: P.O. Box 1089 Blindern, NO-0317 Oslo, Norway

Abstract: 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.

Keywords: Budget deficits; bailouts; appropriating activities

JEL-codes: D29; H72; I18

21 pages, June 29, 2009

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