NICEP Seminar: Silvia Vannutelli (Northwestern University)

Title:  The political economy of stimulus transfers

Abstract:  Stimulus payments are one of the most common policy tools during economic downturns. To maximize effectiveness, transfers should target liquidity-constrained individuals, yet they often end up benefiting the middle class. I argue that political incentives might explain this puzzle. I study one of the largest stimulus tax credits in history, that targeted median earners and excluded the lowest-income groups. The transfer modestly boosted consumption but significantly increased the incumbent’s vote share by 0.18 pp per 1 pp rise in recipients. Electoral rewards persist up to five years post-policy introduction. I then document stronger responses in localities with relatively richer beneficiaries, suggesting that electoral incentives may prompt politicians to prioritize middle-income, electorally responsive groups over the poorer, more consumption-responsive ones. Finally, I document significant punishment of the incumbent among individuals who lose access to the transfer, which help explain politicians’ reluctance to repeal stimulus tax cuts, despite their substantial costs. Overall, these findings demonstrate the importance of considering political incentives to understand the design of major taxes and transfers.