CIRJE-F-422. Doi, Takero and Toshihiro Ihori, "Soft-Budget Constraints and Local Expenditures ", May 2006.

This paper investigates how the soft budget constraint with grants from the central government to local governments tends to exaggerate inefficient localexpenditures. We first develop a theoretical model, which explains soft budget problem in a multi-government setting. We then show that in Japan's case local governments implemented inefficient public investments and hence the bad outcome of soft budget problem occurred in the 1990s.