Effects of subnational heterogeneity on fiscal discipline : a legislative game

Abstract

This article studies how differences in subnational financial strength influence legislative resolutions regarding fiscal matters in federal countries. Legislative coalitions give birth to institutions that shape subnational fiscal incentives. The approach works for particular early periods in federals countries’ history, which we define as “constitutional moments”. Downsian-elected representatives from each region form the Senate, which must decide over a federal grant system. The grant bill will be passed depending on the regional distribution of its costs, given that there is a majority requirement. Some extensions regarding the inter-regional distribution of population, state-specific grants, and the incentives for blocking coalitions are analyzed. Finally, we explore the model’s empirical relevance with a brief survey on the early fiscal federalism in the U.S, Argentina, and Germany.