A comprehensive approach to intergovernmental grants\u2019 tactical allocation. Theory and estimation guidelines

Abstract

Political economy literature highlights the tactical use of intergovernmental grants for electoral purposes; however, it provides different mechanisms and explanations behind these patterns. In this paper, we propose a model that includes 3 branches of the literature in order to provide a comprehensive explanation behind the tactical allocation by central governments. We identify 3 key parameters that shape the tactical allocation of grants: the electoral rule, the relative importance of the objective of the central government with respect to the local government, and the extent to which citizens attribute local expenditure to the direct action of the local government vs the central government (local political appropriability). In addition, our model also provides a guideline for designing and interpreting empirical results on the tactical allocation of grants distribution.