The Effect of Political Alignment on Transfers to Portuguese Municipalities

I investigate if political alignment between central and local governments brings financial benefit to local governments, using financial data from Portuguese municipalities (1992–2005). I use regression discontinuity design to determine the effect of political alignment per se on transfers to municipalities. Municipalities aligned with the central government receive 19% more targetable transfers than unaligned municipalities. I test for electoral motivation of this transfer bias: extra transfers increase the vote share of incumbents in local elections for one of the two Portuguese major parties; however, municipal incumbency does not lead to better results in national elections.     

Political budget cycles and reelection prospects in Greece's municipalities

This paper considers the presence of political budget cycles in Greece's municipalities. We construct a new dataset from primary sources and we find strong evidence of pre-electoral manipulation through increased expenditures and excessive borrowing. We use a dynamic panel data approach producing evidence of opportunistic behavior in local government finances. Our results are robust in the face of a series of controls including mayors running for reelection, their political alignment with the central government, and prolonged terms. Moreover, the results are robust to the exclusion of small sized municipalities and to the restriction of the time range of our investigation to the post-Maastricht period. We also consider whether opportunistic policies influence incumbents' reelection prospects finding that increased expenditures and election year opportunistic excesses are electorally rewarding. Our findings provide a characterization of opportunistic public finance management in Greek municipalities where electorally motivated budgetary decisions appear impervious to the various municipal reform attempts.     

Chasing votes with the public budget

This paper examines the distribution of public resources by an incumbent seeking re-election. I present a model to explain the behavior of an incumbent redistributing public goods and cash transfers. According to the model, politicians use the government budget as a portfolio for electoral investment and diversify expenditure in order to target different groups of voters at the same time. I construct a unique data set of the promises made by the president of Colombia from 2002 to 2010 to municipalities throughout the country's various regions. The empirical results show some evidence that promises of cash transfers targeted swing voters, promises of public goods simultaneously targeted both core and swing municipalities, while opposition municipalities received few promises of cash transfers and public goods, which is consistent with the prediction of the model.     

Fiscal rules to tame the political budget cycle: Evidence from Italian municipalities

The paper provides evidence that fiscal rules can limit the political budget cycle. It uses data on Italian municipalities during the 2000s and shows that: 1) municipalities are subject to political budget cycles in capital spending; 2) the Italian sub-national fiscal rule (Domestic Stability Pact, DSP) introduced in 1999 has been enforced by the central government; 3) municipalities subject to the fiscal rule show more limited political budget cycles than municipalities not subject to the rule. In order to identify the effect, we rely on the fact that the domestic fiscal rule does not apply to municipalities below 5000 inhabitants. We find that the political budget cycle increases real capital spending by about 10–20 percent on average in the years prior to municipal elections and that municipalities subject to the DSP show a pre-electoral increase in capital spending which is only a quarter of the one of municipalities not subject to the rule.     

The effects of inter-municipal cooperation and central grant allocation on the size of the French local public sector

The analysis of French municipalities’ public personnel expenditures allows us to study the issue of the size of the local public sector. We concentrate on two paths that French authorities have followed to limit it, i.e., the promotion of inter-municipal cooperation (IMC) and the cut in grants received by municipalities. Our objective is to evaluate their respective role in the evolution of public personnel expenditures at the municipal level, in a context where local politics comes into play. We consider a large panel dataset of municipalities embedded in IMC structures between 2011 and 2018. Our main results, obtained using an original identification strategy, are threefold. We first find evidence that a substitution effect between municipal and IMC personnel expenditures is at work. Second, we find a partisan distorsion through the grant allocation: despite its formula-based definition, aligned and unaligned municipalities are treated differently by the central government. Third, we show that cuts in grants lead to cuts in municipalities’ public wage bills, while partisanship hinders such cuts.     

Temporary grant programmes in Sweden and central government behaviour

The purpose of this paper is to study whether the central government in Sweden approves applications for temporary grants from municipalities according to political objectives. We also study factors that determine the municipal decision to apply for temporary grants. Two hypotheses are tested, that the central government supports municipalities with many swing voters in order to influence voters, and that the central government provides benefits to groups that share its ideology and that provide political support. Data is used from three election years 1982, 1985, and 1988. Under the Socialist governments municipalities with a high share of Socialist voters were more likely to apply for grants. The same pattern does not apply to the 1982 Conservative government. There is evidence that Socialist governments approved temporary grants on the basis of party tactical criteria. However, there is no indication of vote purchasing behaviour by the 1982 Conservative government.     

Intergovernmental transfers and political competition measured by pivotal probability - Evidence from Hungary

I estimate the effects of political competition on the allocation of intergovernmental transfers to Hungarian municipalities between 1998 and 2006. The intergovernmental transfers were intended to finance schooling, elder care, and administrative needs in municipalities. Rather than use closeness of the dominant blocks' vote share, which is the standard measure of political competition, I instead employ (Myerson, 2000)'s pivotal probabilities, calculated at the municipality level. As a result, the number of voters, in addition to the vote difference, is taken into account when describing political competition at the municipal level. I argue that under mixed-member proportional systems, as well as under proportional systems in general, pivotal probability reflects the political reality better than closeness can. I find evidence that swing municipalities in villages are targeted and, ceteris paribus, that poorer regions receive larger transfer amounts than other areas.     

Revenue decentralization,central oversight and the political budget cycle: Evidence from Israel

This paper examines whether revenue decentralization and direct external financial supervision affect the incidence and strength of political budget cycles, using a panel of Israeli municipalities during the period 1999–2009. We find that high dependence on central government transfers – as reflected in a low share of locally raised revenues in the municipality's budget – exacerbates political budget cycles, while tight monitoring – exercised through central government appointment of external accountants to debt accumulating municipalities – eliminates them. We also find that this pattern is predominantly accounted for by development expenditures. These results suggest that political budget cycles can result from fiscal institutions that create soft budget constraints: that is, where incumbents and rational voters can expect that the costs of pre-election expansions will be partly covered later by the central government.     

The electoral budget cycle on municipal waste collection expenditure

This article analyses the determinants of municipal waste collection expenditure, specifically the effects of electoral cycles on municipal waste collection expenditure. We use a database with information on Spanish municipalities with more than 1000 inhabitants for the period 2002–2011. Our results reveal that incumbents adopt an opportunistic behaviour, increasing spending on waste in the preelection year and reducing it in the election and post-election years. Therefore, we confirm an electoral budget cycle on waste collection expenditures in Spain. Additionally, we find that the levels of income, unemployment and upper-level governments’ transfers have a positive impact on waste collection spending. Finally, population density, level of urbanization, average age of the population of the municipality and less fragmented governments negatively influence waste collection spending.     

FDI与环境规制:基于地方分权视角的实证研究

基于地方分权的视角,本文以环境规制不可直接观测与地方环境决策的策略性博弈为出发点,分别从理论与实证的角度分析是否存在国内地方政府为保持本地的相对优势而采用竞相降低环境标准的方式吸引外商直接投资(FDI)的事实。与已有文献不同,本文通过联合检验地方环境决策竞争效应与环境规制强度对FDI作用方向来判别"逐底竞赛"(race-to-the-bottom)的存在。基于2003—2008年中国277个地级城市构成的面板数据,本文建立空间计量模型对理论命题进行实证检验,结果表明:国内地方政府为吸引FDI而导致的环境政策博弈显著存在,但环境规制对FDI的影响作用平均而言并不显著。分位点估计进一步显示:地方环境决策的竞争程度随分位点的上升而不断增强;环境规制对FDI的作用方向与FDI本身的水平高低密切相关;在FDI低水平的城市间,环境规制对外资并非只是简单的遏止作用;环境"逐底效应"在FDI水平最高的城市间明显弱化,而这一效应在FDI中高水平的城市间最为显著。     

The contribution of equalization transfers to fiscal adjustment: Empirical results for German municipalities and a US–German comparison

This paper considers the role of fiscal equalization in maintaining fiscal balance. It employs a large panel of German municipalities in order to investigate the dynamic fiscal policy adjustment using a vector-error–correction model that explicitly takes account of the intertemporal budget constraint. The results confirm that a substantial part of fiscal adjustment to revenue shocks takes place by offsetting changes in intergovernmental transfers: in present-value terms about 34 cents of a permanent 1 € decrease in own revenues are compensated by subsequent changes in fiscal-equalization transfers. Hence, the contribution of intergovernmental transfers in maintaining fiscal balance is found to be two to three times larger than in the case of US municipalities investigated by Buettner and Wildasin [Buettner, T., Wildasin, D.E., 2006. The dynamics of municipal fiscal adjustment. Journal of Public Economics 90, 1115–1132]. Despite fiscal equalization, however, expenditures are not found to display smaller fluctuations in the German case.     

Asymmetric Decentralization,Intergovernmental Transfers,and Expenditure Policies of Local Governments

Although China’s asymmetric fiscal decentralization system has been criticized for many years, there have been few studies giving direct evidence of its negative incentives on local government spending policies. By introducing the mechanism of asymmetric decentralization and fiscal transfers to the objective function of local government, this paper studies the incentive effects of asymmetric decentralization and fiscal transfers on spending policies of local governments, and uses the provincial panel data to carry out an empirical test. The conclusion shows that the asymmetric decentralization significantly weakens the incentives of local government to increase social expenditure, and as a solution to asymmetric decentralization, fiscal transfers fail to play a good role. Due to the relatively large income effect, the financing mechanism of fiscal transfers not only significantly reduces the incentives of local government to provide social public goods, but also weakens the constraint effect of fiscal competition on expenditure policies of local governments because of the increase in the relative cost. Although the distribution mechanism of fiscal transfers has a significant positive incentive to local government in regions where the net inflow of fiscal resources is more than zero, because of common pooling effects, the comprehensive effects of fiscal transfers in the distribution of incentives of local governments to provide social public goods are negative in all regions.     

Examining the relationship between municipal consolidation and cost reduction: an instrumental variable approach

This study explores the cost-reduction effects of local government consolidation, using data from Japanese municipalities. We use municipal panel data from Japan for the years 2000, 2005 and 2010, a data set including numerous consolidation cases. Reverse causality between consolidation decisions and size of municipal expenditure is a concern in the voluntary consolidation of local governments. An instrumental variable (IV) methodology is employed to deal with possible endogeneity associated with consolidation decisions. The main finding is that municipal current expenditure per capita increases immediately after consolidation, but then gradually declines. Because consolidation seems to increase per capita expenditure in the absence of the effect of this long-term declining trend, incorporating this trend into estimation is crucial in cost-efficiency analysis of consolidation. It is also shown that conventional panel data regressions yield biased consolidation effects, suggesting the superiority of the IV approach.     

Public finance,government spending and economic growth: the case of local governments in Brazil

The impact of local government spending on output growth is estimated using a panel of Brazilian municipalities during 1985–1994. Attention is focused on three expenditure categories, housing/urbanization, health/sanitation, and transport services, which are expected to be growth-enhancing, and their sources of finance (local taxes, intergovernmental transfers, and borrowing). The determinants of these spending categories are also examined. The size of the municipality, measured by the resident population, is shown to affect government spending nonlinearly. This is a contribution to the recent empirical literature on the linkages between decentralized government spending, public finances, and economic growth at the local, rather than national, level.     

Participatory budgeting and the pattern of local government spending: Evidence from South Korea

We use a panel of Korean municipalities to examine the impact of participatory budgeting on local government expenditures. We find that participatory budgeting systematically alters the pattern of local spending. Municipalities using participatory budgeting reallocate resources toward more immediate and visible expenditures and away from long-term development expenditure. We also find evidence that participatory budgeting affects the municipal budget by a greater amount than the expenditures directly allocated through participatory budgeting. Our findings indicate that participatory budgeting leads to the reallocation of local public spending by increasing information flows between policymakers and service users.     

The relevance of commuting zones for regional spending efficiency

We use data envelopment analysis (DEA) efficiency scores to show that clustering municipalities into encompassing regional clusters improves spending efficiency of single stand-alone municipalities. We propose a new geographic aggregation based on municipalities-to-municipalities commuting flows, defined using hierarchical cluster analysis. Our example for Portugal shows that from an output-oriented perspective between 83% and 98% of municipalities would increase their efficiency scores, while from an input-oriented perspective between 86% and 98% of municipalities would also be better off in terms of efficiency. Then using a linear regression model, we find that population increases positively affects the efficient scores (via scale economies). Also, increases in the share of high-educated and poorer residents leads to higher efficiency scores.     

Local representation and strategic voting: Evidence from electoral boundary reforms

We analyze whether voters value local political representation by exploiting municipal mergers, which increase the number of candidates available to voters and intensify political competition. In the Finnish open-list proportional representation system, voters rank the candidates within parties, and thus, concentrating votes to local candidates increases the extent of local representation. Using a difference-in-differences strategy, we find that the vote distributions become more concentrated in municipalities less likely to gain local representation after the mergers. Moreover, the effect is much larger in municipalities where the benefits of local representation to voters are large. The latter result disentangles voters' responses from the responses of other political actors. The results are important also for designing local government mergers, which are an important policy tool in many countries. They highlight that concerns over deteriorating local democracy due to mergers have merit, because voters have preferences for local representation. At the same time, the vote concentration patterns we find alleviate these concerns.     

Competition in taxes and performance requirements for foreign direct investment

Tax incentives offered to attract firms engaged in foreign direct investment are often tied to performance requirements such as domestic content restrictions or adherence to environmental standards. The tax competition literature has repeatedly shown that competition between municipalities for mobile firms tends to drive taxes to low levels. One would expect a comparable result for burdensome performance requirements. Despite this, the evidence suggests that while taxes have indeed been driven down, performance requirements are as popular as ever. We explain this seeming conundrum by showing that in the presence of spillovers, binding performance requirements can act as a coordination device for firms. In equilibrium, municipalities choose performance requirements, which maximize joint surplus from investment. Competition between municipalities then transfers this surplus to firms via tax subsidies.     

Natural disasters and electoral outcomes

Natural disasters are good examples of catastrophic events that may affect vote decisions. In this study, we analyze how the occurrence of earthquakes changes voters' behavior at municipal elections and which channels drive this change, focusing in particular on the role of media exposure. We exploit data from 13,338 municipal electoral cycles where incumbents seek reelection between 1993 and 2015 in Italy. We apply a difference-in-difference strategy with time and cities fixed effect to the probability of reelection and vote share using three different control groups: the universe of municipalities, a sub-sample of neighboring municipalities, and a sub-sample of municipalities identified by a one-to-one nearest-neighbor propensity score matching procedure. We find that the occurrence of destructive earthquakes significantly increases the incumbent mayors’ chance of being reelected and their vote share. We argue that this result is driven by the incumbent mayor advantage in offering recovery from disaster damages combined with a higher visibility on the media in the aftermath of the disaster. Thus, the mediatic relevance of earthquake occurrence may bias voters towards the incumbent.     

Local government type and municipal bond ratings: what’s the relationship?

There is an extensive literature analysing the executive branch within local U.S. government jurisdictions. This has largely revolved around the differences between elected mayors and appointed city managers. Much of the academic work has considered the potential efficiency gains that may be associated with either form of government and comparative analyses between the two. However, the empirical literature has been divided regarding the relative efficiency of either form. This article attempts to add to that literature by considering how bond markets may perceive potential efficiencies that emerge from one executive type over the other by evaluating bond ratings for a sample of large municipal governments in the United States. Overall, the results suggest that municipalities headed by a city manager are associated with increased bond ratings (and thus lower borrowing costs), which may lend support that this form of administration is, on some margin, relatively more efficient than others. These results are robust to a number of specifications.