International Tax and Public Finance

, Volume 24, Issue 3, pp 536–545 | Cite as

Federal subsidization of state expenditure to reduce political budget cycles

  • Thomas Aronsson
  • David Granlund
Policy Watch


In this note, we analyze whether a federal transfer system can be designed to increase welfare when state governments create political budget cycles. The results show how the federal government can counteract the welfare costs of these cycles, without hindering politicians from signaling their type, by announcing a transfer scheme to subsidize expenditures that voters do not consider when voting.


Political economy Intergovernmental transfer Budget cycle 

JEL Classification

D61 D72 H71 



Research grants from the Bank of Sweden Tercentenary Foundation, the Swedish Council for Working Life and Social Research, and the Swedish Tax Agency (all of them through project number RS10-1319:1) are gratefully acknowledged. The authors would also like to thank two anonymous reviewers for helpful comments and suggestions.


  1. Aronsson, T., & Wikström, M. (2001). Optimal taxes and transfers in a multilevel public sector. FinanzArchiv, 58, 158–166.CrossRefGoogle Scholar
  2. Aronsson, T., & Wikström, M. (2003). Optimal taxation and risk-sharing in an economic federation. Oxford Economic Papers, 55, 104–120.CrossRefGoogle Scholar
  3. Blais, A., & Nadeau, R. (1992). The electoral budget cycle. Public Choice, 74, 389–403.Google Scholar
  4. Cho, I., & Kreps, D. (1987). Signaling Games and Stable Equilibria. The Quarterly Journal of Economics, 102, 179–222.CrossRefGoogle Scholar
  5. Dalgic, E., & Long, N. V. (2006). Corrupt local governments as resource farmers: The helping hand and the grabbing hand. European Journal of Political Economy, 22, 115–138.CrossRefGoogle Scholar
  6. Esteller-Moré, A., Galmarini, U., & Rizzo, L. (2012). Vertical tax competition and consumption externalities in a federation with lobbying. Journal of Public Economics, 96, 295–305.CrossRefGoogle Scholar
  7. Gonzalez, M. D. L. A. (2002). Do changes in democracy affect the political budget cycle? Evidence from Mexico. Review of Development Economics, 6, 204–224.CrossRefGoogle Scholar
  8. Granlund, D. (2011). Electoral accountability in a country with two-tiered government. Public Choice, 148, 531–546.CrossRefGoogle Scholar
  9. Mechtel, M., & Potrafke, N. (2013). Electoral cycles in active labor market policies. Public Choice, 156, 181–194.CrossRefGoogle Scholar
  10. Rogoff, K. (1990). Equilibrium Political Budget Cycles. The American Economic Review, 80, 21–36.Google Scholar
  11. Sakurai, S. N., & Menezes-Filho, N. (2011). Opportunistic and partisan election cycles in Brazil: New evidence at the municipal level. Public Choice, 148, 233–247.CrossRefGoogle Scholar
  12. Schneider, C. J. (2010). Fighting with one hand tied behind the back: Political budget cycles in the West German states. Public Choice, 142, 125–150.CrossRefGoogle Scholar
  13. Shi, M., & Svensson, J. (2006). Political budget cycles: Do they differ across countries and why? Journal of Public Economics, 90, 1367–1389.CrossRefGoogle Scholar
  14. Sjahrir, B. S., Kis-Katos, K., & Schulze, G. G. (2013). Political budget cycles in Indonesia at the district level. Economics Letters, 120, 342–345.CrossRefGoogle Scholar
  15. Veiga, L. G., & Veiga, F. J. (2007). Political business cycles at the municipal level. Public Choice, 131, 45–64.CrossRefGoogle Scholar
  16. Wrede, M. (2002). Vertical externalities and control of politicians. Economics of Governance, 3, 135–151.CrossRefGoogle Scholar

Copyright information

© Springer Science+Business Media New York 2016

Authors and Affiliations

  1. 1.Department of Economics, Umeå School of Business and EconomicsUmeå UniversityUmeåSweden

Personalised recommendations