Hat in hand: Does fiscal dependence polarize electoral democracies?

Does the economic dependence of small jurisdictions on central government grants lead to electoral support for the central government's incumbent party? To answer this question, we explore the discontinuities in an unconditional federal grant to Brazilian municipalities to estimate the causal effects of a larger share of grants in the local budget revenue on electoral results throughout 28 years — when three rival parties came to power in succession. Higher dependence on federal grants benefits the central government party in presidential races, whereas the coalition of parties supporting the federal incumbent gains more votes in the National Congress. Enforcing small municipalities' economic reliance on unconditional grants from the central government can be a channel of political alignment — local politicians need federal representatives aligned with the federal government to request budget amendments. Larger jurisdictions can be resilient places for the opposition, as the relative size of their governments is smaller and the average income fluctuates more. JEL: H11, H72, H77 D72