In this paper we will explore the impact of fiscal imbalances on the political survival of subnational governments. When subnational expenditures are mostly financed through transfers from the federal government, subnational politicians have incentives to overfish in the pool of tax-revenues. This happens because subnational incumbents receive political benefits from expenditure transfers but they do not internalize the costs of raising revenues to finance them. The literature on fiscal federalism has extensively analyzed the macroeconomic consequences of the “common pool” problem, but it has overlooked its political consequences. Our basic theoretical claim is that high fiscal imbalances will assist subnational governments to survive in power. Accordingly, we expect higher levels of political survival in federal countries with high fiscal imbalances. We test this hypothesis with a time duration model in a sample of six advanced decentralized democracies for the 1960-2010 period.
