Direct Democracy and Local Public Finances under Cooperative Federalism

In this paper, we exploit the introduction of the right of local initiatives in the German state of Bavaria in 1995 in order to study the fiscal effects of direct democracy. Our identification strategy combines difference‐in‐differences and regression discontinuity methods: we compare municipal expenditure and revenue between pre‐ and post‐reform periods at population thresholds where the signatures needed to launch initiatives and minimum quorum requirements decrease discontinuously (difference‐in‐discontinuities design). The results suggest that stronger direct democratic institutions lead to an expansion of local government size.     

The Heckscher–Ohlin model and the network structure of international trade

This paper estimates for 28 product groups a characteristic parameter that reflects the topological structure of its trading network. Using these estimates, it describes how the structure of international trade has evolved during the 1980–2000 period. Thereafter, it demonstrates the importance of networks in international trade by explicitly accounting for their scaling properties when testing the prediction of the “Heckscher–Ohlin” model that factor endowment differentials determine bilateral trade flows. The results suggest that factor endowment differentials increase bilateral trade in goods that are traded in “dispersed” networks. For goods traded in “concentrated” networks, factor endowment differentials are less important.     

Has Globalisation Affected Collective Bargaining? An Empirical Test, 1980–2009

We investigate whether globalisation has affected the nature of collective bargaining in OECD and emerging countries. The main innovations over the existing empirical literature are (i) the consideration of three distinct aspects of collective bargaining (union density, decentralised bargaining and the extent of government intervention), (ii) the reliance on a sample with a larger cross‐sectional and time dimension (44 countries from 1980 to 2009), and (iii) the application of a more appropriate empirical methodology (dynamic panel data models). We find that globalisation, on average, depresses unionisation but neither affects the degree of decentralisation nor government intervention in collective bargaining. We also uncover significant heterogeneity effects, both across countries and over time.     

Local fiscal policy after a bailout: austerity or soft budget constraints?

Do higher-level governments enforce austerity after bailing out indebted subnational governments or are bailouts a free lunch for the recipients? Analyzing this question empirically is difficult because bailouts are not granted randomly. This paper suggests a method to evaluate the fiscal consequences of subnational bailouts that does not rely on institutional details to obtain quasi-exogenous variation. The main idea is to combine matching and difference-in-differences designs. In a second step, I apply this method to study how bailouts affect the fiscal policy of recipient municipalities in the German federal state of Hesse. Combining disaggregated budget data with data on bailout payments over more than a decade, I find that municipalities consolidate their budgets after they receive a bailout from the state government. While this finding is specific to the German federal context, the proposed methodology can be used, due to its flexibility, to study the fiscal consequences of bailouts in various other settings.     

Soft budget constraints and strategic interactions in subnational borrowing: Evidence from the German States, 1975-2005

Cooperative federations are usually characterized by the existence of bailout guarantees and intergovernmental transfer schemes. This paper explores whether such features of cooperative federations lead to subnational soft budget constraints using panel data from the German States covering the 1975-2005 period. The methodology is based on the premise that subnational governments’ borrowing will exhibit vertical and horizontal strategic interactions if they operate under soft budget constraints. Therefore, a test for strategic interactions in subnational borrowing can be used to infer whether a cooperative federation like Germany is susceptible to soft budget constraints. The results suggest that state borrowing in Germany exhibited horizontal but not vertical interactions during the time-frame of the analysis. This indicates (i) that German States faced soft budget constraints and (ii) that they were more concerned about the likelihood of a bailout than about its volume.     

Creative destruction and fiscal institutions: a long-run case study of three regions

We analyze the rise and decline of the steel and mining industries in the regions of Saarland, Lorraine and Luxembourg. Our main focus is on the period of structural decline in these industries after the second world war. Differences in the institutional framework of these regions are exploited to analyze the way in which the broader fiscal constitution sets incentives for governments either to obstruct or to encourage structural change in the private sector. Our main result is that fiscal autonomy of a region subjected to structural change in its private sector is associated with a relatively faster decline of employment in the sectors affected. Contrary to the political lore, fiscal transfers appear not to be used to speed up the destruction of old sectors, but rather to stabilize them.     

Monetary integration,soft budget constraints,and the EMU sovereign debt crises

One possible explanation for the European sovereign debt crises is that the European Economic and Monetary Union (EMU) gave rise to consolidation fatigue or even deliberate over‐borrowing. This paper explores the validity of this explanation by studying how three decisive stages in the history of the EMU affected public borrowing in EU member states: the signing of the Maastricht Treaty, the introduction of the Euro, and the suspension of the Stability and Growth Pact (SGP). The methodology relies on difference‐in‐difference regressions for 26 OECD countries over the 1975–2009 period. The findings indicate that the Maastricht treaty reduced deficits especially in traditionally high‐deficit countries. In contrast, the introduction of the Euro and the watering down of the original SGP led on average to higher borrowing. These results indicate that the introduction of the Euro and the suspension of the SGP led to soft budget constraints in the EMU.     

Supranational integration and national reorganization: On the Maastricht treaty’s impact on fiscal decentralization in EU countries

We explore the implications of European integration for fiscal decentralization in EU member states with a dataset on 21 OECD countries over the 1975–2000 period. The difference-in-difference methodology is used to establish causality. EU member states are classified as the treatment and non-EU OECD countries as the control group. The Maastricht treaty is interpreted as a quasi-experimental policy intervention that substantially advanced European integration. Our results suggest that tax decentralization has increased in EU countries after the signing of the Maastricht treaty. The treaty’s effect on expenditure decentralization also seems to be positive, but is less clear-cut.     

The revenue and base effects of local tax hikes: evidence from a quasi-experiment

Due to a reform of the local equalization scheme in 2003, a set of municipalities in the German state of North Rhine-Westphalia (NRW) increased their local property and business tax rates by one to two percentage points, while the remaining municipalities kept their rates constant. I use this variation across municipalities and over time to study the revenue and base effects of local property and business tax hikes in a generalized difference-in-differences design. The results suggest that the property tax hikes had even in the long-run a revenue elasticity of unity. Accordingly, I find no adverse effects on property tax bases. For the business tax, I find no significant effects on revenues and bases. Furthermore, there are also no effects on broader economic outcomes such as local employment, firms’ wage bill, and property prices. Overall, increasing local tax rates by one to two percentage points does not seem to affect the local economy adversely.

     

Do bailouts buy votes? Evidence from a panel of Hessian municipalities

I study whether bailouts of local governments carry electoral benefits for state governments with a dataset covering 421 municipalities in the German state of Hesse over the period 1999–2011. I find that past bailouts have no economically significant effect on the municipality-level vote share of the parties that formed the state government in subsequent state elections. On the other hand, bailouts lead to vote increases for the ruling parties in subsequent local elections. On balance, these results suggest that electoral concerns are not the reason why central governments find it difficult to commit to a no-bailout policy.