Fiscal federalism, patients' mobility and the soft budget constraint: a theoretical approach

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 soft budget constraint policy which
involves local authorities persistengly running into a de…cit. In our paper
we explain such behaviour as the result of a game among local authorities
where the more e¢ cient one wants to increase its production beyond local
needs; to do so it induces the less e¢ cient one to make patient receive
services outside their region in exchange for a reduction in the local tax
rate. The lack of coordination between local objectives and total welfare
means that this policy is optimal at local level, but ine¢ cient at Central
Government level. The outcome of such game is a welfare loss.