Decentralization and intra-country transfers in the Great Recession: the case of the European Union

Empirical evidence is found supporting the assignment of the redistribution function to the central government. Viewing the Great Recession, or recessions in general, as a shock, it is found that after the shock, more decentralized economies show a more negative response of subnational government social protection expenditures than more centralized ones. Results for the vertical fiscal imbalance are consistent with the theory of soft budget constraints: economies with a greater vertical fiscal imbalance show larger increases in subnational government social protection expenditures after the shock and greater prior subnational government borrowing. Caution should be used in extending the argument to the European Union level.