Forthcoming inJournal of Development Economics (Version with theoretical model)
One area of fiscal policy in which several countries have delegated responsibility to an independent agency is the distribution of national resource transfers across regional and local governments. Such delegation is expected to promote equity and efficiency, and mitigate distortions created by political incentives. This paper tests whether delegation to an independent agency indeed makes a difference by contrasting the impact of partisan politics on two types of fiscal transfers to states in the Indian federation over a period of time, 1972-1995. The pattern of evidence shows that while the transfers that are determined by the central political executive are indeed distributed to favor particular states that are politically important for the central ruling party, the transfers that are delegated to an independent agency serve to constrain such partisan impact.