Subnational Debt Renegotiation and Elections: Experimentation and Reputation in the Brazilian Fiscal Federalism

Abstract

The present paper analyzes the effect of elections on subnational fiscal policy after debt renegotiations between local (state) governments and the Federal government. First, a stylized model determines under which conditions a state will accept the debt renegotiation requirements and highlights an incentive for the state to reduce tax effort after renegotiation. Next, a dynamic model shows that elections bring about new incentives for nonpayment of debt interests to the Federal government. The model's solution yields two perfect Bayesian equilibria. In the first "experimentation equilibrium" new state governors decide to stop payment of debt interests in order to test the Federal government's willingness to get involved in a politically costly confrontation. In the second "reputation equilibrium" the Federal government decides to withhold federal transfers to any defaulting state, in spite of the high political cost of that decision, in order to avoid defaulting by other states in the future.

Paradox of Concessions in Developing Countries

“…The integrated analysis of the concession mechanism is made by backward induction: This paper first analyzes the Operation Game and then, conditional on the solution of the Operation Game, it derives the Auction Game Equilibrium. The Operation Game is modeled following the approach in Bugarin (2006), which is inspired by the seminal works of Kreps and Wilson (1982) and Milgrom and Roberts (1982) on signaling and reputation.…”

“…Therefore, if the government could first build a reputation before the concession begins, it would increase the likelihood of a successful concession. This could be done if the government could have shown strength in renegotiation in other sectors that would affect the firm's beliefs, for example, in other sectors' concessions or even in subnational debt payment negotiations (Bugarin, 2006).…”

“…The present study explores the interaction between the expectations about contract enforcement of a concession and its initial auction equilibrium. In order to achieve that goal, this study first builds an extensive-form game between a concessionaire and the government, the "Operation Game", based on the signaling games approach of Kreps and Wilson (1982) and Milgrom and Roberts (1982), further explored in the context of subnational debt payments in a Federation in Pires and Bugarin (2002) and Bugarin (2006). The game explores the strategic tradeoffs that the concessionaire faces when deciding whether to comply with the concession contract's investment requirement.…”

Concessão de um aeroporto : integração entre leilão e operação utilizando a teoria dos jogos

“…A partir desse arcabouço metodológico, pode-se sintetizar a técnica utilizada nas pesquisas aplicadas em teoria dos jogos, utilizando como comparação os trabalhos de Souza (2013), Uchôa (2015), Souza (2005), Bugarin (2006) e Wang e…”

“…O autor identificou que o mecanismo analisado incentiva segurados possibilidades de gasto com o objetivo de vencer as eleições. Neste modelo, a sociedade pode ser interpretada como o principal e o governo, seu agente Bugarin (2006). elaborou um modelo utilizando a teoria dos jogos para analisar os efeitos das eleições sobre o cumprimento de compromissos firmados na renegociação de dívidas entre os estados e a União.…”