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Feeding the Leviathan: political competition and soft budget constraints. Evidence from Argentine subnational districts

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  • Osvaldo Meloni

    (Universidad Nacional de Tucumán)

Abstract

In a context of political competition incumbents trade-off the probability of losing office due to an increment in taxes to finance spending against the increase in the probability of remaining in office. However, this is not usual situation faced by subnational jurisdictions authorities that financed a large fraction of local expenditures with sizable discretionary transfers from the central government. It is expected that incumbents use that additional low-cost spending power given by federal transfers to feed clientelistic networks, increase public employment, direct subsidies to constituencies, thus enhancing their chances to remain in office. This paper presents evidence of the influence of political competition on the behavior of fiscal policy in argentine provinces from 1987 to 2015. Contrary to the predominant theory and empirical evidence from subnational districts my estimations of a dynamic panel data show that political competition is associated with increases in public outlays and changes in its composition. This finding is strongly related to the large vertical fiscal imbalances that characterize the argentine fiscal federalism.

Suggested Citation

  • Osvaldo Meloni, 2020. "Feeding the Leviathan: political competition and soft budget constraints. Evidence from Argentine subnational districts," Working Papers 2, Red Nacional de Investigadores en Economía (RedNIE).
    • Handle: RePEc:aoz:wpaper:2
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    Keywords

    political competition soft budget constraints vertical fiscal imbalance;

    JEL classification:

    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
    • P16 - Political Economy and Comparative Economic Systems - - Capitalist Economies - - - Capitalist Institutions; Welfare State

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