Andrey Yushkov is a Ph.D. candidate in public finance at the O’Neill School of Public and Environmental Affairs at Indiana University Bloomington. His research explores various topics in subnational public finance, including fiscal federalism, the political economy of intergovernmental relations, and state & local borrowing, with a particular geographical focus on Russia and the United States. He earned a B.Sc. in Public Administration from St. Petersburg University and an M.Sc. in Economics from the University of Bonn. Before joining IU, Andrey worked as a consultant in several World Bank projects dealing with the issues of public financial management and project evaluation. His work has been published in Public Finance Review, Eurasian Geography & Economics, and the Russian Journal of Economics.
Estimating the Soft Budget Constraint in a Federation
The soft budget constraint is a common problem across post-socialist states. In a federalist setting, it means that the federal government cannot credibly commit not to bail out (or provide financial support to) poorly performing regions when they face economic difficulties. One explanation for the existence of the soft budget constraint is that although it generates economic inefficiencies, it may be politically beneficial for the federal government. In this paper, I empirically evaluate the softness of the budget constraint in the context of the Russian regions in 2012-2019. In particular, I study one potential channel of it (discretionary intergovernmental fiscal transfers) using an instrumental variable strategy proposed by Pettersson-Lindbom (2010, AEJ – Economic Policy) and document the presence of the soft budget constraint in modern Russia: a one standard deviation increase in the share of expected discretionary transfers in total federal transfers (which is on average equal to 14% of total transfers) leads to a 29% increase in per capita regional indebtedness. It implies that regions that expect to be bailed out by future transfers can borrow excessively. I also present several robustness checks in order to identify specific sources of the soft budget constraint (including different types of transfers and debt instruments).