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    Rights statement: This is the author’s pre-peer review version of a work that was accepted for publication in Journal of Public Economics. Changes resulting from the publishing process, such as peer review, editing, corrections, structural formatting, and other quality control mechanisms may not be reflected in this document. Changes may have been made to this work since it was submitted for publication. A definitive version was subsequently published in Journal of Public Economics, 123, 2015 DOI: 10.1016/j.jpubeco.2014.11.007

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Intergovernmental grants as signals and the alignment effect: theory and evidence

Research output: Contribution to journalJournal article

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<mark>Journal publication date</mark>03/2015
<mark>Journal</mark>Journal of Public Economics
Volume123
Number of pages14
Pages (from-to)78-91
Publication statusPublished
Early online date10/12/14
Original languageEnglish

Abstract

This paper provides a simple political agency model to explain the
effect of political alignment between different tiers of government on intergovernmental grants and election outcomes. Key features of the model are (i) rational voters interpret public good provision as a signal of incumbent competence, and (ii) realistically, grants are unobservable to voters. In this setting, the national government will use the grant as an instrument to manipulate the public good signal for the benefit of aligned local incumbents. Then, aligned municipalities receive more grants, with this effect being stronger before elections, and the probability that the
aligned local incumbent is re-elected is higher. These predictions are tested using a regression discontinuity design on a new data-set on Italian municipalities. At a second empirical stage, the national grant to municipalities is instrumented with an alignment indicator, allowing estimation of a flypaper effect for Italian municipalities.

Bibliographic note

This is the author’s pre-peer review version of a work that was accepted for publication in Journal of Public Economics. Changes resulting from the publishing process, such as peer review, editing, corrections, structural formatting, and other quality control mechanisms may not be reflected in this document. Changes may have been made to this work since it was submitted for publication. A definitive version was subsequently published in Journal of Public Economics, 123, 2015 DOI: 10.1016/j.jpubeco.2014.11.007