Intergovernmental Grants as Signals and the Alignment Effect: Theory and Evidence

Ben Lockwood, Michela Redoano (), Emanuele Bracco and Francesco Porcelli

No 10407, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: This paper provides a simple political agency model to explain the effect of political alignment between different tiers of government on intergovernmental grants and election outcomes. Key features of the model are: (i) rational voters interpret public good provision as a signal of incumbent competence, and (ii) realistically, grants are unobservable to voters. In this setting, the national government will use the grant as an instrument to manipulate the public good signal for the benefit of aligned local incumbents and challengers. Then, aligned municipalities receive more grants, with this effect being stronger before elections, and the probability that the aligned local incumbent is re-elected is higher. These predictions are tested using a regression discontinuity design on a new data-set on Italian municipalities. At a second empirical stage, the national grant to municipalities is instrumented with an alignment indicator, allowing estimation of a flypaper effect for Italian municipalities.

Keywords: Fiscal federalism; Political competition; Accountability; Flypaper effect (search for similar items in EconPapers)
JEL-codes: D7 H2 H77 H87 (search for similar items in EconPapers)
Date: 2015-02
New Economics Papers: this item is included in nep-cdm, nep-pbe and nep-pol
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (107)

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Related works:
Journal Article: Intergovernmental grants as signals and the alignment effect: Theory and evidence (2015)
Working Paper: Intergovernmental Grants as Signals and the Alignment Effect: Theory and Evidence (2015)
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