Research Seminar: “Who Sent You? Extreme Voting, Transfers, and Bailouts in a Federation”
Lower-level governments often receive federal support through transfers or bailouts. We study how the regional ties of federal politicians can steer this process, and bring about extreme voting. We build a two-tier model of government, where federal legislators bargain over support aimed at their own constituency. As a result, they are strategically elected to watch over the interests of their own region, cushioning shocks to local welfare. As long as federal co-funding schemes imply some degree of interregional redistribution, voters select federal representatives with more extreme positions than the median voter to stack federal bargaining in their favour. Lower-level legislators anticipate this, which sets the stage for regional over-borrowing. Our empirical analysis confirms these predictions, by comparing the political extremism of representatives elected to the EU Parliament with that of representatives elected to national Parliaments.