Why is the system of regional financing in Spain unstable?

Abstract

The main purpose of this article is to analyze the explanatory factors of regional financing instability. The analysis is based on an extensive-form game and shows that instability is the result of a combination of national and regional governments? rational strategies. On the one hand, central government is unable to build a reputation as a strong player and refrain from using the modification of regional financing to maximize its electoral strategies. On the other hand, the particular design of decentralization in Spain prompts regional governments to continually renegotiate financing agreements. Renegotiation incentives have to do with the asymmetries between the common and «foral» systems of financing, the overly transferbiased system, and the ongoing revision of the distribution of powers across levels of government. Instability will be contingent upon the institutional context that gives rise to perverse incentives. Therefore, no matter how strongly central government commit to set up a stable system of financing: the instability will surely continue pro - vided that the current structure of incentive remains.