The Links Between Fiscal Federalism, Political Alignment and Elections

Abstract

Does economic dependence of small towns on federal grants lead to electoral support? To answer this question, we use an exogenous rule of distribution to estimate the effects of the main federal transfer to Brazilian small towns on the results of elections throughout 20 years, when two rival parties succeeded in power. We find that more dependence on unconditional grants benefits the central government party, whereas the main opposition party loses votes in races to president and National Congress. The hypothesis is that enforcing economic dependence of small towns on the central government's unconditional grants can be a channel of political alignment - they need federal deputies aligned to the federal government to ask for budget amendments. On the other hand, larger cities can be a resilient place of opposition, once the size of government is smaller and where average income fluctuates more, especially in periods of low economic growth.