Beyond the socio‐economic use of fiscal transfers: The role of political factors in Greek intergovernmental grant allocations

Abstract

AbstractThe aim of this paper is to explore the political factors lying behind the allocation of state grants to local government by providing empirical evidence from Greece. Results show that political considerations exert a statistically significant influence over the allocation of state grants to local government. Mayors politically aligned with the incumbent government receive higher shares of grants compared to the non‐aligned counterparts. Furthermore, political business cycle provides an important determinant in explaining the fluctuations in local government transfers. Grants to local government increase in the years before the national or local elections and wane over the following years. Our evidence also unveils the importance of re‐elected mayor's experience and networking in enticing fiscal allocations, thereby establishing consecutive mayoral wins as a key determinant of the municipality fiscal inducement. Collectively, contrary to the predictions of normative theory, our evidence demonstrates that political considerations rather than socioeconomic needs are able to explain the levels of grant allocations to Greek municipalities.