Unveiling Vertical State Downscaling: Identity and/or the Economy?

State rescaling may take a variety of shapes although scant research has been carried out into the mechanisms and economic incentives that underpin rescaling processes. This paper identifies and measures the effect of two broad state downscaling mechanisms, namely the development of regional identity - operating at the cultural level and proxing preference heterogeneity-, and the heterogeneity in levels of economic development; influencing the extent of regional redistribution. Firstly, we empirically examine our claim at an aggregate level using evidence from Catalonia and the Basque Country, to examine the evolution of sub-state identity and the rise of inter-territorial fiscal grievances - weakening intraregional economic solidarity. Secondly, we estimate how the combination of widening sub-national identity and regional redistribution strengthens support for vertical state downscaling. Findings suggest an expansion of spatial identities in both Catalonia and the Basque Country since the early 1980’s. Ending regional fiscal solidarity it is found to increase the average income of Catalonia and the Basque Country by 37% and 17% respectively. Although we find evidence of elite driven support for state downscaling, the effect of regional identity on downscaling support exceeds that of regional redistribution in the magnitude of one to seven.