{"ID":2882388,"CreatedAt":"2026-06-01T04:54:23.091178241Z","UpdatedAt":"2026-06-01T04:54:23.091178241Z","DeletedAt":null,"paper_url":"https://arxiv.org/abs/2508.10724","arxiv_id":"2508.10724","title":"Two-Instrument Screening under Soft Budget Constraints","abstract":"We study soft budget constraints in multi-tier public finance when an upper-tier government uses two instruments: an ex-ante grant schedule and an ex-post rescue. Under convex rescue costs and standard primitives, the three-stage leader-follower problem collapses to one dimensional screening with a single allocation index: the cap on realized rescue. A hazard-based characterization delivers a unified rule that nests (i) no rescue, (ii) a threshold-cap with commitment, and (iii) a threshold--linear--cap without commitment. The knife-edge for eliminating bailouts compares the marginal cost at the origin to the supremum of a virtual weight, and the comparative statics show how greater curvature tightens caps while discretion shifts transfers toward front loading by lowering the effective grant weight. The framework provides a portable benchmark for mechanism design and yields testable implications for policy and empirical work on intergovernmental finance.","short_abstract":"We study soft budget constraints in multi-tier public finance when an upper-tier government uses two instruments: an ex-ante grant schedule and an ex-post rescue. Under convex rescue costs and standard primitives, the three-stage leader-follower problem collapses to one dimensional screening with a single allocation in...","url_abs":"https://arxiv.org/abs/2508.10724","url_pdf":"https://arxiv.org/pdf/2508.10724v2","authors":"[\"Xinli Guo\"]","published":"2025-08-14T15:07:10Z","proceeding":"econ.TH","tasks":"[\"econ.TH\",\"eess.SY\",\"math.OC\"]","methods":"[]","has_code":false}