Provision of public goods in a federal economy: The role of party politics

We analyze the role of political parties in the provision of public goods within a federal economy. The public goods are federally funded but locally produced (with costly local revenues), and have interjurisdictional spillover effects. The direction and magnitude of fund flow, which ultimately determine the local provision of public goods, are influenced by the re-election probability of the parties in power at the federal and provincial levels. The prevailing wisdom is that provincial governments, which are ruled by the same political party as that ruling at the federal level, enjoy a higher level of federal transfers. We demonstrate that there exists incentive effect of federal transfer complementing such partisan effects.