Does fiscal discipline towards subnational governments affect citizens' well-being? Evidence on health.

This paper aims to assess the impact on citizens' well-being of fiscal discipline imposed by the central government on subnational governments. Because healthcare policies involve strategic interactions between different layers of governments in many different countries, we focus on a particular dimension of well-being, namely citizens' health. We model fiscal discipline by considering government expectations of future deficit bailouts from the central government. We then study how these bailout expectations affect the expenditure for healthcare policies carried out by decentralized governments. To investigate this issue, we separate efficient health spending from inefficiencies by estimating an input requirement frontier. This allows us to assess the effects of bailout expectations on both the structural component of health expenditure and its deviations from the 'best practice'. The evidence from the 15 Italian ordinary statute regions (observed from 1993 to 2006) points out that bailout expectations do not significantly influence the position of the frontier, thus not affecting citizens' health. However, they do appear to exert a remarkable impact on excess spending.