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

57 Pages Posted: 10 Mar 2015

See all articles by Emanuele Bracco

Emanuele Bracco

Lancaster University

Ben Lockwood

University of Warwick - Department of Economics; Centre for Economic Policy Research (CEPR); CESifo (Center for Economic Studies and Ifo Institute)

Francesco Porcelli

University of Warwick

Michela Redoano

University of Warwick - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Multiple version iconThere are 2 versions of this paper

Date Written: February 27, 2015

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

JEL Classification: H20, H77, H87, D70

Suggested Citation

Bracco, Emanuele and Lockwood, Ben and Porcelli, Francesco and Redoano, Michela, Intergovernmental Grants as Signals and the Alignment Effect: Theory and Evidence (February 27, 2015). CESifo Working Paper Series No. 5215, Available at SSRN: https://ssrn.com/abstract=2576145

Emanuele Bracco

Lancaster University ( email )

Lancaster - LA1 4YW
United Kingdom

Ben Lockwood

University of Warwick - Department of Economics ( email )

Coventry CV4 7AL
United Kingdom
+44 24 7652 8906 (Phone)
+44 24 7657 2548 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Francesco Porcelli

University of Warwick ( email )

Gibbet Hill Rd.
Coventry, West Midlands CV4 8UW
United Kingdom

Michela Redoano (Contact Author)

University of Warwick - Department of Economics ( email )

Coventry CV4 7AL
United Kingdom
+44 24 7652 3474 (Phone)
+44 24 7652 3032 (Fax)

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

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