Published online by Cambridge University Press: 14 January 2010
Sacrificing subtlety for breadth, the last two chapters made broad arguments about fiscal and political structures and supported them with aggregate cross-national data. This approach is advantageous above all because it provides a context to guide the selection of countries for more-nuanced case studies and the raw material for more-refined arguments. Faced with an overwhelming array of countries, data, and stories but limitations on time and tractability, this chapter explains how the arguments and results above point to a clear strategy for (1) placing existing single-country studies in a comparative framework, and (2) selecting countries to analyze more carefully. At the heart of Chapter 4 was a two-by-two table depicting aggregate transfer dependence on the horizontal axis and subnational borrowing autonomy on the vertical axis. Analysis of credit ratings suggested that in countries on the right, where transfer dependence is higher, the center is more likely to be perceived as an implicit guarantor of subnational debt. Yet as long as such countries also sit near the bottom of the table, where subnational governments are unable to borrow independently, the resulting moral-hazard problem is circumvented. Indeed, the empirical model estimated long-term balanced budgets for these subordinate subnational governments.
Thus, the bailout game is most interesting in the top two quadrants of the table in which subnational governments are relatively free to borrow. Most of the occupants have a long history of federalism.