Place Based Policies with Local Voting: Lessons From the EU Cohesion Policy

Abstract

I study place based policies under local political economy constraints, asking whether transfers across regions can foster regional convergence. I show that, if local workers can vote over the within-region allocation of the transfers, these may be spent unproductively and be ineffective in supporting growth—especially where growth is most needed. Due to migration responses to transfers, they may even have unintended consequences and be harmful for economic growth in poorer regions. These conclusions follow even though voters are assumed to be fully sophisticated and to anticipate the general equilibrium consequences of the policy. Using data on the EU Cohesion Policy in 2007–13, I show that, in regions with many low skilled workers, funds are significantly less likely to be invested in technological development, innovation, and research. In line with the theory, this occurs only when regional authorities are among the managers of the funds, but not when these are managed by national authorities, who do not cater to local voters.