Amedeo Piolatto (UAB)

“Who Sent You? Extreme Voting, Transfers and Bailouts in a Federation”

Abstract: Lower-level governments often receive federal support through transfers or bailouts. We study how the regional or local ties of federal politicians can steer this process. We build a two-tier model of government, where regionally elected federal legislators bargain over federal support aimed at their own constituency. This leads to strategic voting on the regional level. Federal legislators are strategically elected to watch over the interests of their own region, cushioning shocks to local consumption and driving down borrowing costs. Lower-level legislators anticipate this, which sets the stage for regional overspending both if they receive annual grants, or when a bailout scheme is introduced during periods of crisis. As long as these federal co-funding schemes imply some degree of interregional redistribution, voters strategically select federal representatives with more extreme positions than the median voter. This prediction is confirmed by our empirical analysis, where we compare the political extremism of representatives elected to the EU Parliament with that of representatives elected to national Parliaments.