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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

Abstract

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.

Keywords

Political economy Intergovernmental transfer Budget cycle 

JEL Classification

D61 D72 H71 

Notes

Acknowledgments

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.

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Copyright information

© Springer Science+Business Media New York 2016

Authors and Affiliations

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

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