Distribution of transfers and soft budget spending behaviors: evidence from Italian regions

This paper examines empirically the strategic interactions among central and subcentral governments when incomplete information forces the subcentral government to form expectations about the amount of transfers that it will receive from the central one. The empirical analysis features a wide array of proxies for transfer expectations and uses an autoregressive modeling technique to estimate them on a sample of 20 Italian Regions for the 1995–2009 time interval. The analysis shows that transfer expectations are a quantitatively important component of local government spending, revealing evidence of soft budget spending behavior.