Voters as Fiscal Liberals: Incentives and Accountability in Federal Systems

Most empirical evidence indicates voters penalize deficits and spending growth. Contrary to this dominant finding, a few recent studies conclude that voters reward public spending. We reconcile these conflicting findings, positing that the structure of fiscal federalism in countries like Argentina causes voters to reward fiscal expansion because they perceive that this extra spending at the margin is not financed by them, but rather by the nation at large. We provide evidence and microfoundations for the electoral connection implicit in this argument: voters reward public spending when they can pass the cost on to someone else (e.g., as in Argentina), and punish it otherwise (e.g., as in the United States).