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| Format: | Preprint |
| Veröffentlicht: |
2025
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| Online-Zugang: | https://arxiv.org/abs/2508.02171 |
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| _version_ | 1866912653412139008 |
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| author | Guo, Xinli |
| author_facet | Guo, Xinli |
| contents | Newfoundland and Labrador's municipalities face severe soft budget pressures due to narrow tax bases, high fixed service costs, and volatile resource revenues. We develop a Stackelberg style mechanism design model in which the province commits at t = 0 to an ex ante grant schedule and an ex post bailout rule. Municipalities privately observe their fiscal need type, choose effort, investment, and debt, and may receive bailouts when deficits exceed a statutory threshold. Under convexity and single crossing, the problem reduces to one dimensional screening and admits a tractable transfer mechanism with quadratic bailout costs and a statutory cap. The optimal ex ante rule is threshold-cap; under discretionary rescue at t = 2, it becomes threshold-linear-cap. A knife-edge inequality yields a self-consistent no bailout regime, and an explicit discount factor threshold renders hard budgets dynamically credible. We emphasize a class of monotone threshold signal rules; under this class, grant crowd out is null almost everywhere, which justifies the constant grant weight used in closed form expressions. The closed form characterization provides a policy template that maps to Newfoundland's institutions and clarifies the micro-data required for future calibration. |
| format | Preprint |
| id |
arxiv_https___arxiv_org_abs_2508_02171 |
| institution | arXiv |
| publishDate | 2025 |
| record_format | arxiv |
| spellingShingle | Optimal Transfer Mechanism for Municipal Soft-Budget Constraints in Newfoundland Guo, Xinli Theoretical Economics Optimization and Control Newfoundland and Labrador's municipalities face severe soft budget pressures due to narrow tax bases, high fixed service costs, and volatile resource revenues. We develop a Stackelberg style mechanism design model in which the province commits at t = 0 to an ex ante grant schedule and an ex post bailout rule. Municipalities privately observe their fiscal need type, choose effort, investment, and debt, and may receive bailouts when deficits exceed a statutory threshold. Under convexity and single crossing, the problem reduces to one dimensional screening and admits a tractable transfer mechanism with quadratic bailout costs and a statutory cap. The optimal ex ante rule is threshold-cap; under discretionary rescue at t = 2, it becomes threshold-linear-cap. A knife-edge inequality yields a self-consistent no bailout regime, and an explicit discount factor threshold renders hard budgets dynamically credible. We emphasize a class of monotone threshold signal rules; under this class, grant crowd out is null almost everywhere, which justifies the constant grant weight used in closed form expressions. The closed form characterization provides a policy template that maps to Newfoundland's institutions and clarifies the micro-data required for future calibration. |
| title | Optimal Transfer Mechanism for Municipal Soft-Budget Constraints in Newfoundland |
| topic | Theoretical Economics Optimization and Control |
| url | https://arxiv.org/abs/2508.02171 |