A Game-theory Analysis of the Spanish Regional Financing System

Recent history has shown the inherent instability of the Spanish Regional Financing System. This system is key to the design of a fiscal framework aimed at ensuring budgetary stability, debt sustainability and transparency. In this paper we examine issues related to moral hazard and deficit bias from a game theory perspective. We combine classical concepts from game theory (Nash equilibrium, subgame perfection) with concepts derived from refinements (theory of moves) aimed at introducing dynamic elements in the normal-form game, rendering it more suitable for the study of repeated, recurrent interactions.