¹Andrew Young School of Policy Studies, Georgia State University, PO Box 3992, Atlanta, GA 30302-3992, USA. E-mail: atimofeev@gsu.edu

¹I am grateful to Olga Shirokova, Econometric Unit Vedi (Moscow) for supplying some of the information used in this study. I am also grateful to Roland Anderson, Andrew Austin, Stepan Jurajda, Jorge Martinez-Vazquez, Saloua Sehili, Jan Svejnar, and participants of Ronald Coase Institute's Workshop in Institutional Analysis, 2002, and the 61st Congress of the International Institute of Public Finance, 2005, for helpful comments and discussions. All remaining errors are solely mine.

Abstract

Subnational governments' access to credit is essential for smoothing out shocks to their revenue and expenditures, including those associated with large infrastructure projects. However, governments might pursue an unsustainable borrowing path unless they face appropriate incentives. Theoretically, credit markets can discourage excessive borrowing by charging risk premia rising with the level of indebtedness. We examine the robustness of this market mechanism under the evolving institutions of decentralised governance in a transitional country. Russia presents a perfect case for such analysis, for the market discipline was the only constraint on subnational borrowing there throughout the 1990s.