Granting votes: Exposing the political bias of intergovernmental grants using the within-between specification for panel data

Instead of alleviating fiscal inequalities, intergovernmental grants are often used to fulfill the grantors’ political goals. This study uses a unique panel dataset on the level of more than 500 Croatian municipalities over a twelve-year period to uncover to which extent grant distribution is biased due to grantors’ electoral concerns. Instead of the default fixed effects approach to model panel data, we apply a novel within-between specification aimed at uncovering the contextual source of variation, focusing on the effects of electoral concerns on grant allocation within and between municipalities. We find evidence of a substantial political bias in grant allocation both within and between municipalities, particularly when it comes to local-level electoral concerns. The paper offers researchers a new perspective when tackling the issue of politically-biased grant allocation using panel data, particularly in cases where they wish to uncover the simultaneous impact of time-variant and time-invariant factors, or when they cannot apply a quasi-experimental approach due to specific circumstances of the given institutional context.