A comprehensive approach to intergovernmental grants’ tactical allocation. Theory and estimation guidelines

Fiorillo, F., Merkaj, E., 2021 –  International Tax and Public Finance

Although it is commonly accepted that intergovernmental transfers are used for electoral purposes, there is no clear agreement on the direction characterizing this use. In countries like Italy, should one expect transfers to favor regions with more supporters of the central government or, rather, to be used to persuade undecided voters in each region, thus leaning more towards contested regions? What direction should we expect to take the tactical use of transfers for electoral purposes?

In a recent work entitled “A comprehensive approach to intergovernmental grants’ tactical allocation. Theory and estimation guidelines”, published in International Tax and Public Finance, Fabio Fiorillo and Elvina Merkaj focus on resource allocation from central to local governments, particularly on their tactical use for electoral purposes. The authors propose a comprehensive model that integrates three key branches of the political economy literature, and offer a nuanced understanding of the patterns observed in the allocation of resources. A first theoretical framework, known as the “core supports model”, posits that risk-averse central governments allocate resources to jurisdictions with a significant number of supporters. This strategic allocation is driven by the higher risk of losing votes in areas with few supporters of the incumbent. A second framework emphasizes the targeting of voters with uncertain preferences, denominated “swing” voters. According to this model, resources are directed towards jurisdictions with a higher number of swing voters, who are more likely to be swayed by the allocation of transfers. The third theoretical approach, presented by Brollo and Nannicini (2012) and further developed by Bracco, Lockwood, Porcelli, and Redoano (2015) suggests that central governments strategically allocate resources to support the re-election of aligned local governments.

The authors build a model, introducing three crucial parameters – α, β, and μ – which guide the selection of the applicable theory in different institutional contexts and help the interpretation of empirical results. The parameter α represents the weight assigned to the re-election of the central incumbent compared to that of the local incumbent, with higher values indicating a greater focus on its own re-election. The parameter β reflects the influence of the national electoral rule, distinguishing between proportional (β = 0) and first-past-the-post systems (β = 1). The parameter μ captures local political appropriability, indicating the extent to which local incumbents can take credit for resource spending in their jurisdictions.

Based on these parameters, a set of distinct propositions are derived, leading to two cases:

In the first case, where the central government prioritizes its own re-election (α ≈ 1), and a proportional electoral rule is in place (β = 0), resources tend to favor core jurisdictions with a high share of central incumbent supporters. Conversely, under a first-past-the-post rule (β = 1), resources are directed toward swing jurisdictions with minimal differences in vote shares.

In the second case, where the central government prioritizes local election results (α ≈ 0), the allocation of resources depends on the level of local political appropriability. When local political appropriability is high, resources tend to favor aligned local governments, especially in swing jurisdictions. On the other hand, when local political appropriability is low, resources are strategically allocated to swing jurisdictions independently of the alignment with the central government.

The interaction among the parameters α, β, and μ offers valuable insights into the motivations underlying resource distribution. In the real world, there can be an infinite variety of mixed scenarios, representing combinations of the three key parameters, as also highlighted by other studies. For example, in Italy, the local government’s perceived responsibility for local policies drives tactical distribution of funds to swing and aligned jurisdictions, in order to favor the aligned regional incumbents where electoral competition is more intense. Similar patterns emerge in Spain and Brazil. Non-pure proportional rules, as coupled with partial local appropriability, explain the central incumbent’s focus on swing jurisdictions in Ghana, Senegal, and Portugal. In Germany, where a strong proportional rule is in place, tactical allocation favors central government supporters by means of transfers with not too high a local appropriability.

Studies on intergovernmental transfers could be reinterpreted using these findings as a guidance. The findings suggest that different countries and types of transfers are correlated with specific structural parameters, which determine the conditions that steer different tactical allocation strategies. Finally, these guidelines are also helpful at devising an accurate empirical strategy when analyzing tactical allocation.

Go to the published article