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

Abstract

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. I conjecture that governors use the additional low-cost spending power given by federal transfers to feed clientelistic networks, increase public employment and direct subsidies to constituencies, thus enhancing their chances to remain in office.