Political alignment and project funding

International Tax and Public Finance https://doi.org/10.1007/s10797-022-09758-6 Political alignment and project funding Luisa Schneider1 · Daniela Wech1 · Matthias Wrede1 Accepted: 7 August 2022 © The Author(s) 2022 Abstract We analyze the relationship between the party affiliation of politicians at different levels of government and the spatial distribution of funding for research, development and innovation projects. In particular, we are investigating whether more federal grants are being granted in Germany for projects in federal states whose government is led by the same political party as the responsible ministry at federal level. Our dataset contains detailed information on publicly funded projects in Germany in the period 2010–2019. Using a fixed-effects estimation approach, we find a link between grant allocation and party affiliation of funding for research, development and innovation projects, in particular smaller ones. For these projects, political alignment is associated with an average increase in public funding by almost 10,000 euro. Our results suggest that public funds for research, development and innovation projects could be used more efficiently than they are. Keywords Project funding · Political alignment · Innovation policy · Regional policy · Intergovernmental relations · New public management JEL Classification D72 · R12 · H77 1 Introduction Economic growth and social returns are primary objectives of government investment. However, public investments and transfers serve not only the general interest but also the interests of specific groups. Driven by different motivations, politicians Luisa Schneider, Daniela Wech, and Matthias Wrede have contributed equally to this work. * Luisa Schneider Matthias Wrede 1 Chair of Economics and Social Policy, Friedrich-Alexander Universität Erlangen-Nürnberg (FAU), Findelgasse 7, 90402 Nuremberg, Germany 13 Vol.:(0123456789) L. Schneider et al. are likely to have an incentive to influence the allocation and spatial distribution of public investments and transfers. This also applies to the financing of research and development projects, provided that such projects bind highly qualified workers to the respective locations and have local multiplier effects. Questions frequently addressed in the literature are whether the location of core constituencies and swing voters or vote margins influence the distribution of transfers (see Dellmuth, Schraff, & Stoffel, 2017; Kauder, Potrafke, & Reischmann, 2016; Larcinese, Snyder, & Testa, 2013). In the same way, central governments might use transfers to support aligned subnational governments (see Brollo & Nannicini, 2012). Electoral concerns can be one reason for such alignment biases: Subnational governments who share the central government’s party are expected to offer support in upcoming elections. Moreover, central governments might especially support aligned subnational governments to reward loyalty and to push through the own political agenda on the local level. Firstly, this incentive is of relevance especially in Germany where many policy measures are implemented on the subnational level. The federal member states share state authority with the federation and are thus endowed with a variety of decision competencies. On the municipal level, the German constitution ensures a certain level of self-administration to facilitate independent decision making within local communities. Secondly, aligned governments might naturally have similar policy interests or tend to readily support central party decisions due to a given level of party discipline (Baskaran & Hessami, 2017; Curto-Grau & Zudenkova, 2018). The international literature has addressed questions around potential alignment biases intensively, however mostly utilizes intergovernmental transfers in investigating the impact of such political compounds. While recent studies suggest that higher-tier governments tend to distribute intergovernmental transfers in favor of lower-tier governments with the same political affiliation (see Baskaran & Hessami, 2017; Bracco, Lockwood, Porcelli, & Redoano, 2015; Brollo & Nannicini, 2012), only little is known on the impact of political alignment on project funding in the highly relevant field of research and innovation. We extend previous studies by examining the effect of political affiliations between federal and subnational governments on research and development funding, which has, to our knowledge, not yet been considered in this regard. Our dataset contains detailed information on publicly funded research and development projects in Germany over the period 2010–2019. Since a large number of recipients receive funding several times, the identifying variation occurs between projects from the same grant recipient. We thus analyze whether recipients’ projects are granted higher amounts in periods where the state they are located in is politically aligned with the federal government. This allows us to analyze whether federal states which are ruled by the same political party as the federal ministry which distributes the grant, benefit from this political connection. Since state governments only benefit indirectly from project grants, finding a significant impact could be of particular interest and would suggest that distortions might even exist in areas where one would not expect them in the first place. It is particularly important to analyze and optimize the allocation of funds, since in Germany high and increasing public expenditures are made for the support of research and innovation. Having spent 3% of GDP on research and innovation in 2018, Germany has already reached one goal of the Europe 2020 strategy 13 Political alignment and project funding with a new target set to 3.5% until 2025. This corresponds to an increase of government investments in this field by around 70% between 2005 and 2017 (Bundesministerium für Bildung und Forschung, 2019, 2020). The importance of research and innovation in previous years’ budgets becomes even clearer when compared to infrastructure-related investments, which amounted to just 1.7% of GDP in 2018 (Bundesministerium für Wirtschaft und Energie, 2020). Governmental research and innovation investments are one key element in fostering regions’ competitiveness and achieving equal living conditions (Bundesministerium für Bildung und Forschung, 2020). Moreover, research has shown that such investments yield positive externalities for recipient regions (see Kang et al. (2019) and Tingvall and Videnord (2020), for instance). Distributing funds based on political rather than normative criteria is likely to result in a misallocation of resources which questions the efficiency of concerned investment programs. In the long run, misallocations might affect economic growth and cultivate disparities between regions (Kitsos & Proestakis, 2021; Asher & Novosad, 2017). Moreover, distortions due to political alignment are likely to (...truncated)