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Instituto Valenciano de Investigaciones Económicas


Who Sent You? Strategic Voting, Transfers and Bailouts in a Federation
WP-AD 2018-05
Who Sent You? Strategic Voting, Transfers and Bailouts in a Federation
Daniele, G., Piolatto, A. and Sas, W.
Year of publication: 2018
Keywords: Strategic Delegation, Decentralisation, Soft Budget Constraints, Political Extremism, Bailouts, Intergovernmental Grants, Fiscal Federalism.
JEL Classification: H6, H71, H74, H77
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.