Advanced Search
MyIDEAS: Login to save this paper or follow this series

Policy Responses to Fiscal Restraints: A Difference-in-Discontinuities Design

Contents:

Author Info

  • Veronica Grembi
  • Tommaso Nannicini
  • Ugo Troiano

Abstract

We evaluate the effect of relaxing fiscal rules on policy outcomes applying a quasi-experimental research design. In 1999, the Italian central government introduced fiscal rules aimed at imposing fiscal discipline on municipal governments, and in 2001 the rules were relaxed for municipalities below 5,000 inhabitants. This institutional change allows us to implement a “difference-in-discontinuities” design by combining the before/after with the discontinuous policy variation. Our estimates show that relaxing fiscal rules triggers a substantial deficit bias, captured by a shift from a balanced budget to a deficit that amounts to 2 percent of the total budget. The deficit comes primarily from reduced revenues as unconstrained municipalities have lower real estate and income tax rates. Finally, we investigate the heterogeneity in policy responses across municipalities to provide new evidence about the costs and benefits of restricting fiscal policy. The impact is larger if the mayor can run for reelection, the number of political parties seated in the city council is higher, voters are older, the performance of the mayor in providing public good is lower, and cities are characterized by historical deficit, consistently with models on the political economy of fiscal adjustment.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2012/wp-cesifo-2012-11/cesifo1_wp3999_1.pdf
Download Restriction: no

Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 3999.

as in new window
Length:
Date of creation: 2012
Date of revision:
Handle: RePEc:ces:ceswps:_3999

Contact details of provider:
Postal: Poschingerstrasse 5, 81679 Munich
Phone: +49 (89) 9224-0
Fax: +49 (89) 985369
Email:
Web page: http://www.cesifo.de
More information through EDIRC

Related research

Keywords: fiscal rules; local government finance; difference-in-discontinuities;

Other versions of this item:

Find related papers by JEL classification:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Imbens, Guido W. & Lemieux, Thomas, 2008. "Regression discontinuity designs: A guide to practice," Journal of Econometrics, Elsevier, Elsevier, vol. 142(2), pages 615-635, February.
  2. Alesina, Alberto & Hausmann, Ricardo & Hommes, Rudolf & Stein, Ernesto, 1999. "Budget institutions and fiscal performance in Latin America," Journal of Development Economics, Elsevier, Elsevier, vol. 59(2), pages 253-273, August.
  3. Song, Zheng Michael & Storesletten, Kjetil & Zilibotti, Fabrizio, 2012. "Rotten Parents and Disciplined Children: A Politico-Economic Theory of Public Expenditure and Debt," CEPR Discussion Papers, C.E.P.R. Discussion Papers 8738, C.E.P.R. Discussion Papers.
  4. Stefano Gagliarducci & Tommaso Nannicini, 2008. "Do Better Paid Politicians Perform Better? Disentangling Incentives from Selection," Working Papers, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University 346, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  5. James M. Poterba & Jürgen von Hagen, 1999. "Fiscal Institutions and Fiscal Performance," NBER Books, National Bureau of Economic Research, Inc, National Bureau of Economic Research, Inc, number pote99-1.
  6. Persson, T. & Tabellini, G., 1997. "Political Economics and Macroeconomic Policy," Papers, Stockholm - International Economic Studies 630, Stockholm - International Economic Studies.
  7. Battaglini, Marco & Coate, Stephen, 2007. "A Dynamic Theory of Public Spending, Taxation and Debt," Working Papers, Cornell University, Center for Analytic Economics 07-04, Cornell University, Center for Analytic Economics.
  8. Philippe Aghion & Alberto Alesina & Francesco Trebbi, 2002. "Endogenous Political Institutions," NBER Working Papers 9006, National Bureau of Economic Research, Inc.
  9. Clemens, Jeffrey, 2013. "State Fiscal Adjustment During Times of Stress: Possible Causes of the Severity and Composition of Budget Cuts," MPRA Paper 55921, University Library of Munich, Germany.
  10. Fatás, Antonio & Mihov, Ilian, 2004. "The Macroeconomic Effects of Fiscal Rules in the US States," CEPR Discussion Papers, C.E.P.R. Discussion Papers 4372, C.E.P.R. Discussion Papers.
  11. Besley, Timothy & Smart, Michael, 2007. "Fiscal restraints and voter welfare," Journal of Public Economics, Elsevier, Elsevier, vol. 91(3-4), pages 755-773, April.
  12. Thomas Lemieux & Kevin Milligan, 2004. "Incentive Effects of Social Assistance: A Regression Discontinuity Approach," NBER Working Papers 10541, National Bureau of Economic Research, Inc.
  13. Raj Chetty & Adam Looney & Kory Kroft, 2007. "Salience and Taxation: Theory and Evidence," NBER Working Papers 13330, National Bureau of Economic Research, Inc.
  14. Ichino, Andrea & Maggi, Giovanni, 2000. "Work Environment And Individual Background: Explaining Regional Shirking Differentials In A Large Italian Firm," CEPR Discussion Papers, C.E.P.R. Discussion Papers 2387, C.E.P.R. Discussion Papers.
  15. James M. Poterba, 1993. "State Responses to Fiscal Crisis: The Effects of Budgetary Institutionsand Politics," NBER Working Papers 4375, National Bureau of Economic Research, Inc.
  16. Charles Wyplosz, 2012. "Fiscal Rules: Theoretical Issues and Historical Experiences," NBER Chapters, National Bureau of Economic Research, Inc, in: Fiscal Policy after the Financial Crisis, pages 495-525 National Bureau of Economic Research, Inc.
  17. James M. Poterba, 1996. "Budget Institutions and Fiscal Policy in the U.S. States," NBER Working Papers 5449, National Bureau of Economic Research, Inc.
  18. Per Pettersson-Lidbom, 2001. "An Empirical Investigation of the Strategic Use of Debt," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 109(3), pages 570-583, June.
  19. Marco Bassetto & Thomas J Sargent, 2006. "Politics and Efficiency of Separating Capital and Ordinary Government Budgets," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 121(4), pages 1167-1210, November.
  20. Gordon, Robert J., 1989. "Comments 'political and economic determinants of budget deficits in the industrial democracies' by N. Roubini and J.D. Sachs," European Economic Review, Elsevier, Elsevier, vol. 33(5), pages 934-938, May.
  21. Timothy Besley & Torsten Persson & Daniel M. Sturm, 2010. "Political Competition, Policy and Growth: Theory and Evidence from the United States," CEP Discussion Papers, Centre for Economic Performance, LSE dp1009, Centre for Economic Performance, LSE.
  22. Lucas, Robert Jr. & Stokey, Nancy L., 1983. "Optimal fiscal and monetary policy in an economy without capital," Journal of Monetary Economics, Elsevier, Elsevier, vol. 12(1), pages 55-93.
  23. Signe Krogstrup & Sébastien Wälti, 2008. "Do fiscal rules cause budgetary outcomes?," Public Choice, Springer, Springer, vol. 136(1), pages 123-138, July.
  24. Massimo Bordignon & Guido Tabellini, 2009. "Moderating Political Extremism: Single Round vs Runoff Elections under Plurality Rule," DISCE - Quaderni dell'Istituto di Economia e Finanza, Università Cattolica del Sacro Cuore, Dipartimenti e Istituti di Scienze Economiche (DISCE) ief0087, Università Cattolica del Sacro Cuore, Dipartimenti e Istituti di Scienze Economiche (DISCE).
  25. Nannicini, Tommaso & Stella, Andrea & Tabellini, Guido & Troiano, Ugo, 2010. "Social Capital and Political Accountability," CEPR Discussion Papers, C.E.P.R. Discussion Papers 7782, C.E.P.R. Discussion Papers.
  26. Weingast, Barry R & Shepsle, Kenneth A & Johnsen, Christopher, 1981. "The Political Economy of Benefits and Costs: A Neoclassical Approach to Distributive Politics," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 89(4), pages 642-64, August.
  27. Knight, Brian G., 2000. "Supermajority voting requirements for tax increases: evidence from the states," Journal of Public Economics, Elsevier, Elsevier, vol. 76(1), pages 41-67, April.
  28. Dickert-Conlin, Stacy & Elder, Todd, 2010. "Suburban legend: School cutoff dates and the timing of births," Economics of Education Review, Elsevier, Elsevier, vol. 29(5), pages 826-841, October.
  29. Barry Eichengreen & Jurgen von Hagen, 1996. "Fiscal Policy and Monetary Union: Is There a Tradeoff between Federalism and Budgetary Restrictions?," NBER Working Papers 5517, National Bureau of Economic Research, Inc.
  30. Eric Maskin, 2003. "The Politician and the Judge: Accountability in Government," Theory workshop papers, UCLA Department of Economics 505798000000000076, UCLA Department of Economics.
  31. Andrea Prat & Oriana Bandiera & Tommaso Valletti, 2007. "Active and Passive Waste in Government Spending: Evidence from a Policy Experiment," Levine's Bibliography 843644000000000100, UCLA Department of Economics.
  32. List, John & Sturm, Daniel M, 2004. "How Elections Matter: Theory and Evidence from Environmental Policy," CEPR Discussion Papers, C.E.P.R. Discussion Papers 4489, C.E.P.R. Discussion Papers.
  33. Alberto Alesina & Guido Tabellini, 1988. "Voting on the Budget Deficit," NBER Working Papers 2759, National Bureau of Economic Research, Inc.
  34. Douglas Sutherland & Robert W.R. Price & Isabelle Joumard, 2005. "Fiscal Rules for Sub-central Governments: Design and Impact," OECD Economics Department Working Papers 465, OECD Publishing.
  35. Pettersson-Lidbom, Per, 2012. "Does the size of the legislature affect the size of government? Evidence from two natural experiments," Journal of Public Economics, Elsevier, Elsevier, vol. 96(3), pages 269-278.
  36. Auerbach, Alan J., 2006. "Budget windows, sunsets, and fiscal control," Journal of Public Economics, Elsevier, Elsevier, vol. 90(1-2), pages 87-100, January.
  37. Alberto Alesina & Roberto Perotti, 1996. "Budget Deficits and Budget Institutions," IMF Working Papers, International Monetary Fund 96/52, International Monetary Fund.
  38. Persson, Torsten & Tabellini, Guido, 2002. "Political economics and public finance," Handbook of Public Economics, Elsevier, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 3, chapter 24, pages 1549-1659 Elsevier.
  39. von Hagen, Jurgen, 1991. "A note on the empirical effectiveness of formal fiscal restraints," Journal of Public Economics, Elsevier, Elsevier, vol. 44(2), pages 199-210, March.
  40. Lizzeri, Alessandro, 1999. "Budget Deficits and Redistributive Politics," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 66(4), pages 909-28, October.
  41. Tabellini, Guido & Alesina, Alberto, 1990. "A Positive Theory of Fiscal Deficits and Government Debt," Scholarly Articles 3612769, Harvard University Department of Economics.
  42. Clemens, Jeffrey & Miran, Stephen, 2010. "The effects of state budget cuts on employment and income," MPRA Paper 38715, University Library of Munich, Germany.
  43. Roubini, Nouriel & Sachs, Jeffrey D., 1989. "Political and economic determinants of budget deficits in the industrial democracies," European Economic Review, Elsevier, Elsevier, vol. 33(5), pages 903-933, May.
  44. Barro, Robert J, 1974. "Are Government Bonds Net Wealth?," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 82(6), pages 1095-1117, Nov.-Dec..
  45. Besley, Timothy, 2007. "Principled Agents?: The Political Economy of Good Government," OUP Catalogue, Oxford University Press, Oxford University Press, number 9780199283910, October.
  46. Barro, Robert J., 1979. "On the Determination of the Public Debt," Scholarly Articles 3451400, Harvard University Department of Economics.
  47. Michael Gavin & Roberto Perotti, 1997. "Fiscal Policy in Latin America," NBER Chapters, National Bureau of Economic Research, Inc, in: NBER Macroeconomics Annual 1997, Volume 12, pages 11-72 National Bureau of Economic Research, Inc.
  48. Galasso, Vincenzo & Nannicini, Tommaso, 2009. "Competing on Good Politicians," IZA Discussion Papers 4282, Institute for the Study of Labor (IZA).
  49. Marina, Azzimonti & Marco, Battaglini & Stephen, Coate, 2010. "On the Case for a Balanced Budget Amendment to the U.S. Constitution," MPRA Paper 25935, University Library of Munich, Germany.
  50. Persson, Torsten & Svensson, Lars E. O., 1989. "Exchange rate variability and asset trade," Journal of Monetary Economics, Elsevier, Elsevier, vol. 23(3), pages 485-509, May.
  51. Banks, Jeffrey S. & Sundaram, Rangarajan K., 1998. "Optimal Retention in Agency Problems," Journal of Economic Theory, Elsevier, Elsevier, vol. 82(2), pages 293-323, October.
  52. Besley, Timothy & Case, Anne, 1995. "Does Electoral Accountability Affect Economic Policy Choices? Evidence from Gubernatorial Term Limits," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 110(3), pages 769-98, August.
  53. Fischer, Stanley, 1983. "`Optimal fiscal and monetary policy in an economy without capital' by Robert E. Lucas and Nancy L. Stokey," Journal of Monetary Economics, Elsevier, Elsevier, vol. 12(1), pages 95-99.
  54. Mark Hallerberg & Jurgen von Hagen, 1997. "Electoral Institutions, Cabinet Negotiations, and Budget Deficits in the European Union," NBER Working Papers 6341, National Bureau of Economic Research, Inc.
  55. Yianos Kontopoulos & Roberto Perotti, 1999. "Government Fragmentation and Fiscal Policy Outcomes: Evidence from OECD Countries," NBER Chapters, National Bureau of Economic Research, Inc, in: Fiscal Institutions and Fiscal Performance, pages 81-102 National Bureau of Economic Research, Inc.
  56. James M. Poterba & Jürgen von Hagen, 1999. "Introduction to "Fiscal Institutions and Fiscal Performance"," NBER Chapters, National Bureau of Economic Research, Inc, in: Fiscal Institutions and Fiscal Performance, pages 1-12 National Bureau of Economic Research, Inc.
  57. Hahn, Jinyong & Todd, Petra & Van der Klaauw, Wilbert, 2001. "Identification and Estimation of Treatment Effects with a Regression-Discontinuity Design," Econometrica, Econometric Society, Econometric Society, vol. 69(1), pages 201-09, January.
  58. McCrary, Justin, 2008. "Manipulation of the running variable in the regression discontinuity design: A density test," Journal of Econometrics, Elsevier, Elsevier, vol. 142(2), pages 698-714, February.
  59. Alberto Alesina & Roberto Perotti, 1995. "The Political Economy of Budget Deficits," IMF Staff Papers, Palgrave Macmillan, vol. 42(1), pages 1-31, March.
  60. Tamim Bayoumi & Barry Eichengreen, 1995. "Restraining Yourself: The Implications of Fiscal Rules for Economic Stabilization," IMF Staff Papers, Palgrave Macmillan, vol. 42(1), pages 32-48, March.
  61. Casaburi, Lorenzo & Troiano, Ugo, 2013. "Ghost-House Busters: The Electoral Response to a Large Anti Tax Evasion Program," MPRA Paper 52242, University Library of Munich, Germany.
  62. Alberto Alesina & Tamim Bayoumi, 1996. "The Costs and Benefits of Fiscal Rules: Evidence from U.S. States," NBER Working Papers 5614, National Bureau of Economic Research, Inc.
  63. Stephanie Riegg Cellini & Fernando Ferreira & Jesse Rothstein, 2010. "The Value of School Facility Investments: Evidence from a Dynamic Regression Discontinuity Design," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 125(1), pages 215-261, February.
  64. Xavier Debrun & Laurent Moulin & Alessandro Turrini & Joaquim Ayuso-i-Casals & Manmohan S. Kumar, 2008. "Tied to the mast? National fiscal rules in the European Union," Economic Policy, CEPR;CES;MSH, CEPR;CES;MSH, vol. 23, pages 297-362, 04.
  65. Wilbert van der Klaauw, 2008. "Regression-Discontinuity Analysis: A Survey of Recent Developments in Economics," LABOUR, CEIS, CEIS, vol. 22(2), pages 219-245, 06.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
This item has more than 25 citations. To prevent cluttering this page, these citations are listed on a separate page.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:ces:ceswps:_3999. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Julio Saavedra).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.