Inequality and economic activity under regional favoritism: evidence from Argentina

Abstract

In this study we examine the existence of regional favoritism in districts of Argentina (i.e., political leaders who systematically favor their district of birth). To do this, we build an annual panel of districts that includes records of nighttime luminosity, as a proxy for inequality and economic activity, and the district of birth of each governor between 1992–2013. The estimates arise from a two-way fixed effects model, an event study design and spatial and temporal placebos. The results confirm the existence of regional favoritism for the Argentine case: inequality increases in the districts of birth of the governors up to 1.26% annually while they are in office. The existence of regional favoritism also translates into a significant increase in GDP—between 1.1% and 1.7% each year—. These results are robust to multiple robustness checks—including the incorporation of spatial effects—and spatial and temporal placebos. The findings of the study help to guide public management audit efforts and to achieve a more efficient use of fiscal resources. Ultimately, these findings constitute a warning against regional favoritism since it tends to favor the upper deciles of the income distribution—increases inequality between districts—and constitutes a case of clear inefficiency: more available resources in a district fails to reduce inequality.