Fiscal Federalism, Patient Mobility and the Soft Budget Constraint

Abstract

In some countries the reform of public health care provision has been accompanied by a parallel process of devolution that has also entailed the organisation of health care becoming a regional competence. However, the application of fiscal federalism in the context of the provision of health care is not so straightforward due to the nature of the services involved. In this paper we will concentrate on the related phenomenon of the soft budget constraint phenomenon. This framework can be traced back to that of a game where less efficient local authorities prefer to send their citizens to receive services outside their region instead of becoming more efficient. In order to improve the probability of being bailed out, the users are sent to other local authorities where there is excess capacity. The lack of coordination between local objectives and total welfare means that this policy is optimal at local level, but inefficient at Central Government level.