{"ID":2886775,"CreatedAt":"2026-06-01T04:54:23.091178241Z","UpdatedAt":"2026-06-01T04:54:23.091178241Z","DeletedAt":null,"paper_url":"https://arxiv.org/abs/2508.02171","arxiv_id":"2508.02171","title":"Optimal Transfer Mechanism for Municipal Soft-Budget Constraints in Newfoundland","abstract":"Newfoundland and Labrador's municipalities face severe soft budget pressures due to narrow tax bases, high fixed service costs, and volatile resource revenues. We develop a Stackelberg style mechanism design model in which the province commits at t = 0 to an ex ante grant schedule and an ex post bailout rule. Municipalities privately observe their fiscal need type, choose effort, investment, and debt, and may receive bailouts when deficits exceed a statutory threshold. Under convexity and single crossing, the problem reduces to one dimensional screening and admits a tractable transfer mechanism with quadratic bailout costs and a statutory cap. The optimal ex ante rule is threshold-cap; under discretionary rescue at t = 2, it becomes threshold-linear-cap. A knife-edge inequality yields a self-consistent no bailout regime, and an explicit discount factor threshold renders hard budgets dynamically credible. We emphasize a class of monotone threshold signal rules; under this class, grant crowd out is null almost everywhere, which justifies the constant grant weight used in closed form expressions. The closed form characterization provides a policy template that maps to Newfoundland's institutions and clarifies the micro-data required for future calibration.","short_abstract":"Newfoundland and Labrador's municipalities face severe soft budget pressures due to narrow tax bases, high fixed service costs, and volatile resource revenues. We develop a Stackelberg style mechanism design model in which the province commits at t = 0 to an ex ante grant schedule and an ex post bailout rule. Municipal...","url_abs":"https://arxiv.org/abs/2508.02171","url_pdf":"https://arxiv.org/pdf/2508.02171v4","authors":"[\"Xinli Guo\"]","published":"2025-08-04T08:09:21Z","proceeding":"econ.TH","tasks":"[\"econ.TH\",\"math.OC\"]","methods":"[]","has_code":false}