The purpose of the paper is to analyze the decision to postpone maintenance expenditures in regional governments using a game-theoretical approach and investigate whether there may be rational reasons for regional governments to carry a maintenance backlog.
A theoretical political economy model, originally used to explain fiscal deficits in regional governments, is revisited and used to explain maintenance backlogs.
It can be fully rational for regional governments to carry maintenance backlogs, given that they expect the central government to “bail out” this backlog, e.g. through an extra grant earmarked for upgrading of facilities. Hence, a balanced budget regulation (BBR) demanding fiscal balance in regional governments is not sufficient to avoid bailouts. The results suggest that the central government should consider including maintenance of facilities in formal BBRs.
The paper is relevant for policy makers, as it can give guidance with respect to the design of BBRs. The paper illustrates that regulations that only take fiscal balance into account are too narrow to secure that bailouts are avoided. The reason is that regional governments can strategically use maintenance backlogs to generate bailouts even when regional government borrowing is abolished. To avoid this, the central government could make the regulations more extensive, and also include demands regarding maintenance in the regulations.
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