Levels of subnational democracy vary significantly within countries around the world. Drawing on fiscal theories of the state, the author argues that this variance is often explained by a type of rentierism that is not geographically determined by natural resources but politically created by certain fiscal federalism arrangements. He posits that less democratic regimes are more likely in rentier provinces—those that receive disproportionately large central government transfers and practically forgo local taxation. Intergovernmental revenue-sharing rules that produce large vertical fiscal imbalances and favor the economically smaller districts provide their incumbents with generous “fiscal federalism rents” that allow them to restrict democratic contestation and weaken checks and balances. Statistical evidence from a panel data set of the Argentine provinces strongly confirms this expectation, even after controlling for standard alternative explanations such as level of development. Sensitivity analysis shows that this finding is extremely robust to alternative panel estimators. Qualitative and quantitative evidence suggests that the effect of heavy public spending on the economic autonomy of political actors is the main causal mechanism at work.
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