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Who Sent You? Strategic Voting, Transfers and Bailouts in a Federation

Gianmarco Daniele, Amedeo Piolatto () and Willem Sas ()

Working Papers. Serie AD from Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie)

Abstract: Lower-level governments often receive federal support through transfers or bailouts. We study how the regional or local ties of federal politicians can steer this process. We build a two-tier model of government, where regionally elected federal legislators bargain over federal support aimed at their own constituency. This leads to strategic voting on the regional level. Federal legislators are strategically elected to watch over the interests of their own region, cushioning shocks to local consumption and driving down borrowing costs. Lower-level legislators anticipate this, which sets the stage for regional over-borrowing both if they receive annual grants, or when a bailout scheme is introduced during periods of crisis. Voters strategically select federal representatives with more extreme positions than the median voter, as long as federal co-funding schemes imply some degree of interregional redistribution. These theoretical predictions are confirmed by our empirical analysis, where we compare the political extremism of representatives elected to the EU Parliament with that of representatives elected to national Parliaments.

Keywords: Strategic Delegation; Decentralisation; Soft Budget Constraints; Political Extremism; Bailouts; Intergovernmental Grants; Fiscal Federalism. (search for similar items in EconPapers)
JEL-codes: H6 H71 H74 H77 (search for similar items in EconPapers)
Pages: 69 pages
Date: 2018-09
New Economics Papers: this item is included in nep-cdm, nep-pbe, nep-pol and nep-ure
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Working Paper: Does the Winner Take It All? Redistributive Policies and Political Extremism (2020) Downloads
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