Domestic Consequences of International Financial Aid: Evidence from the Marshall Plan in Post-War Italy

How does international financial aid shape domestic politics? We address this question through the allocation of Marshall Plan funds in context of the 1948 elections in Italy at the onset of the Cold War. We argue that marginal electoral winners and losers face systematically different incentives when channeling international financial aid. Narrowly losing candidates, excluded from parliament but needing to sustain local reputations, have strong incentives to direct funds to their home municipalities. By contrast, narrowly winning candidates, whose career advancement depends on party leaders, prioritize party strongholds over their hometowns. Using a close-parliamentary regression discontinuity design, we show that municipalities tied to narrow-losers received significantly more Marshall Plan resources per capita than those tied to narrow-winners. These allocation patterns also left lasting legacies: municipalities linked to narrow-losers exhibited stronger Communist support and weaker Christian Democratic support in subsequent elections. Qualitative evidence from candidate biographies corroborates the mechanism, showing that narrow-losers from the Communist Party were especially active in lobbying for funds to cultivate reputations as effective local brokers. Our findings advance research on foreign aid, distributive politics, and clientelism, showing that reconstruction aid reshapes political competition in recipient states in ways that may diverge from donor intentions.