@techreport{Heppke-Falk2007Moral,
abstract = {We identify investor moral hazard in the German fiscal federation. Our identification strategy is based on a variable, which was used by the German Federal Constitutional Court as an indicator to determine eligibility of two German states (L\"{a}nder) to a bail-out, the interest payments-to-revenue ratio. While risk premia measured in the German sub-national bond market react significantly to the relative debt level of a state (Land), we also find that a larger interest payments-to-revenue ratio counter-intuitively lowers risk premia significantly. Furthermore, with increasing values the risk premia decrease more strongly. This is evidence of investor moral hazard, because a larger indicator value increases the likelihood of receiving a bail-out payment. Quantitatively, the effects are, however, quite small. Our findings are robust to a variety of sample changes. In addition, we provide a case study of the recent Federal Constitutional Court ruling on the Land Berlin, which had filed for additional federal funds. The negative response of the court did not lead to a change in financial markets' bail-out expectations. In sum, our results indicate significant investor moral hazard in the sub-national German bond market.},
author = {Kirsten H. Heppke-Falk and Guntram B. Wolff},
copyright = {http://www.econstor.eu/dspace/Nutzungsbedingungen},
keywords = {F34; H6; H7; G14; G15; E62; 330; moral hazard; bail-out; sovereign bond spreads; fiscal federalism; Germany; L\"{a}nderfinanzen; \"{O}ffentliche Schulden; \"{O}ffentliche Anleihe; Risikopr\"{a}mie; Finanzausgleich; Moral Hazard; Sch\"{a}tzung; Deutschland; Berlin},
language = {eng},
number = {2007,07},
title = {Moral hazard and bail-out in fiscal federations: evidence for the German L\"{a}nder},
type = {Discussion paper Series 1 / Volkswirtschaftliches Forschungszentrum der Deutschen Bundesbank},
url = {http://hdl.handle.net/10419/19684},
year = {2007}
}
