Elections and de facto expenditure decentralization in Canada

This paper empirically investigates the underlying determinants of the respective roles of different levels of government in expenditure functions, guided by recent theoretical developments on the political economy of partial expenditure decentralization. We adopt a theoretical framework in which the degree of expenditure decentralization is endogenous and depends, in equilibrium, on the relative political conditions prevailing at each level of government. Consistent with the model’s predictions, empirical results from a panel of Canadian provinces show that the share of total expenditure in a province assumed by the provincial government increases with the electoral strength of the provincial government and decreases with the electoral strength of the federal government, in addition to being affected significantly by the partisan affiliation of both levels of government. A series of alternative empirical specifications, including an IV regression exploiting campaign spending data, are presented to assess the robustness of these results.