Public Choice

, Volume 161, Issue 1–2, pp 11–29 | Cite as

Distribution of transfers and soft budget spending behaviors: evidence from Italian regions

  • Fabio Padovano


This paper examines empirically the strategic interactions among central and subcentral governments when incomplete information forces the subcentral government to form expectations about the amount of transfers that it will receive from the central one. The empirical analysis features a wide array of proxies for transfer expectations and uses an autoregressive modeling technique to estimate them on a sample of 20 Italian Regions for the 1995–2009 time interval. The analysis shows that transfer expectations are a quantitatively important component of local government spending, revealing evidence of soft budget spending behavior.


Expectations Intergovernmental relations Transfers Local public spending Soft budget spending behavior 

JEL Classification

H71 H73 H77 D78 



Paper presented at the 2010 PEARLE seminar, the CREM-CNRS seminars of the Université de Rennes 1, the Université de Dijon, the EPIO seminars of the University of Paris 1, and the University of Aarhus, Denmark and the 2011 Public Choice Society Conference. I wish to thank Maarten Allers, Marie-Laure Breuillé, Alberto Cassone, Jean-Michel Josselin, Jean-Dominique Lafay, Peter Nannestad, Martin Paldam, Sonia Paty, Ilaria Petrarca, Yvon Rocaboy, Jørn Rattsø, Albert Solé-Ollé, Gilberto Turati, Stanley Winer, three anonymous referees and the Editor for very helpful comments previous versions of the paper. Enza Iannopollo provided excellent research assistance. The usual caveat applies.


  1. Alesina, A., & Drazen, A. (1991). Why are stabilizations delayed? The American Economic Review, 81, 1170–1188. Google Scholar
  2. Allers, M. A., & Ishemoi, L. J. (2011). Do formulas reduce political influence on intergovernmental grants? Evidence from Tanzania. Journal of Development Studies, 47, 1781–1797. CrossRefGoogle Scholar
  3. Ambrosiano, M. F., Bordignon, M., & Cerniglia, F. (2008). Constitutional reforms, fiscal decentralization and regional fiscal flows in Italy. Università Cattolica del Sacro Cuore, mimeo. Google Scholar
  4. Angrist, J. D., & Pischke, J. S. (2010). Mostly harmless econometrics, an empiricist’s companion. Princeton: Princeton University Press. Google Scholar
  5. Arachi, G., & Zanardi, A. (2004). Designing intergovernmental fiscal relations: some insights from the recent Italian reform. Fiscal Studies, 25, 325–365. CrossRefGoogle Scholar
  6. Arhulampalam, W., Dasgupta, S., Dhillon, A., & Dutta, B. (2009). Electoral goals and centre-state transfers in India. Journal of Development Economics, 88, 103–119. CrossRefGoogle Scholar
  7. Bordignon, M., & Turati, G. (2009). Bailing out expectations and public health expenditure. Journal of Health Economics, 28, 305–321. CrossRefGoogle Scholar
  8. Brosio, G., & Piperno, S. (2007). Governo e finanza locale (3rd ed.). Torino: Giappichelli. Google Scholar
  9. Cox, G., & McCubbins, M. (1986). Electoral politics as a redistributive game. The Journal of Politics, 48, 89–370. CrossRefGoogle Scholar
  10. Del Monte, A., & Papagni, E. (2007). The determinants of corruption in Italy: regional panel data analysis. European Journal of Political Economy, 23, 379–396. CrossRefGoogle Scholar
  11. Dewatripont, M., & Maskin, E. (1995). Credit and efficiency in centralized and decentralized economies. Review of Economic Studies, 62, 541–555. CrossRefGoogle Scholar
  12. Dixit, A., & Londregan, J. (1996). The determinants of success of special interests in redistributive politics. The Journal of Politics, 58, 1132–1155. CrossRefGoogle Scholar
  13. Drazen, A. (2001). The political business cycle after 25 years. NBER macroeconomics annual 2000. Cambridge: MIT Press. Google Scholar
  14. Fiorino, N., Galli, E., & Petrarca, I. (2012). Corruption and growth: evidence from the Italian regions’. European Journal of Government and Economics, 1, 126–144. Google Scholar
  15. Goodspeed, T. J. (2002). Bailouts in a federation. International Tax and Public Finance, 9, 409–421. CrossRefGoogle Scholar
  16. Harsanyi, J. C. (1967–1968). Games with incomplete information played by Bayesian players. Management Science, 14, 159–182; 320–334; 486–520, Part I–III. CrossRefGoogle Scholar
  17. Holtz-Eakin, D., & Rosen, H. (1993). Municipal construction spending: an empirical examination. Economics and Politics, 5, 61–84. CrossRefGoogle Scholar
  18. Kornai, J., Maskin, E., & Roland, G. (2003). Understanding the soft budget constraint. Journal of Economic Literature, 151, 1095–1136. CrossRefGoogle Scholar
  19. Inman, R. (2003). Transfers and bailouts: enforcing local fiscal discipline with lessons from the US federalism. In J. Rodden & G. Eskeland (Eds.), Fiscal decentralization and the challenge of hard budget constraint. Cambridge: MIT Press. Google Scholar
  20. Josselin, J.-M., Padovano, F., & Rocaboy, Y. (2013). Fiscal rules vs. political culture as determinants of soft budget spending behaviors. European Journal of Comparative Economics. Forthcoming. Google Scholar
  21. Le-Maux, B., & Zhang, W. (2012). Does political fragmentation lead to budgetary incrementalism? An empirical test on the French local public sector. Papers in Regional Science., 92, 535–553. Google Scholar
  22. Maskin, E. (1999). Recent theoretical work on the soft budget constraint. The American Economic Review, 89, 421–425. CrossRefGoogle Scholar
  23. Mueller, D. C. (2003). Public choice III. Cambridge: Cambridge University Press. CrossRefGoogle Scholar
  24. Olson, M. Jr. (1982). The rise and decline of nations: economic growth, stagflation, and social rigidities. New Haven: Yale University Press. Google Scholar
  25. Padovano, F. (2012). The drivers of interregional policy choices: evidence from Italy. European Journal of Political Economy, 28, 324–340. CrossRefGoogle Scholar
  26. Padovano, F. (2011). Causes and consequences of bailing-out expectations of subcentral governments: Theory and evidence from Italian regions. CREM-CNRS Working Paper n. 2011-28. Google Scholar
  27. Padovano, F., & Venturi, L. (2001). Wars of attrition in government coalitions and fiscal performance: a test on Italian 1948–1994 data. Public Choice, 109, 15–54. CrossRefGoogle Scholar
  28. Pettersson-Lidblom, P. (2010). Dynamic commitment and the soft budget constraint: an empirical test. American Economic Journal: Economic Policy, 2, 154–179. Google Scholar
  29. Pettersson-Lidblom, P., & Dahlberg, M. (2003). An empirical approach for evaluating soft budget constraints. Working Papers Series 2003,28, Uppsala University, Department of Economics. Google Scholar
  30. Qian, Y., & Roland, G. (1998). Federalism and the soft budget constraint. The American Economic Review, 8, 1141–1162. Google Scholar
  31. Rattsø, J. (1999). Aggregate local public sector investment and shocks: Norway 1946–1999. Applied Economics, 31, 577–584. CrossRefGoogle Scholar
  32. Rodden, J. (2006). Achieving fiscal discipline in federations: Germany and the EMU. In P. Wierts, S. Deroose, E. Flores, & A. Turrini (Eds.), Fiscal policy surveillance in Europe. New York: Palgrave MacMillan. Google Scholar
  33. Rodden, J. (2005). Breaking the golden rule: fiscal behavior with rational bailout expectations in the German states. MIT, mimeo. Google Scholar
  34. Rodden, J. & Eskeland, G. (Eds.) (2003). Fiscal decentralization and the challenge of hard budget constraints. Cambridge: MIT Press. Google Scholar
  35. Rogoff, K. (1990). Equilibrium political budget cycles. The American Economic Review, 80, 21–36. Google Scholar
  36. Stein, E. (1999). Fiscal decentralization and government size in Latin America. Journal of Applied Economics, 2, 357–391. Google Scholar
  37. Turati, G. (2003). Modelli regionali di sanità. Roma, Ministero dell’Economia e delle Finanze, Commissione Tecnica per la Spesa Pubblica. Google Scholar
  38. Wildawski, A. (1964). Politics of the budgetary process. Little Brown: Boston. Google Scholar

Copyright information

© Springer Science+Business Media New York 2013

Authors and Affiliations

  1. 1.CREM-CNRS and Centre Condorcet for Political EconomyUniversité de Rennes 1RennesFrance
  2. 2.DPS-Università Roma TreRomaItaly

Personalised recommendations