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Do Parties Matter?: Estimating the Effect of Political Power in Multi-party Systems

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  • Ronny Freier
  • Christian Odendahl
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    Abstract

    This paper estimates the effect of political power on tax policies in municipal councils under a proportional election system. The main challenge in estimating the causal effect of parties on policy is to isolate the effect of power from underlying voter preferences and the selection effect of parties. We use an instrumental variable approach where close elections provide the exogenous variation in our variable of interest: voting power. Using data from German municipalities in the state of Bavaria, our estimation results suggest that power does matter. Somewhat surprisingly, the center-left party SPD is found to lower all three locally controlled taxes, whereas The Greens increase both property taxes considerably. These results remain robust across a range of specifications. What is more, the effect of the SPD is confirmed by a simple regression discontinuity estimation of mayors in these local governments.

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    File URL: http://www.diw.de/documents/publikationen/73/diw_01.c.398005.de/dp1205.pdf
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    Bibliographic Info

    Paper provided by DIW Berlin, German Institute for Economic Research in its series Discussion Papers of DIW Berlin with number 1205.

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    Length: 46 p.
    Date of creation: 2012
    Date of revision:
    Handle: RePEc:diw:diwwpp:dp1205

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    Keywords: local taxation; local election; municipality data instrumental variable approach;

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    1. Atila Abdulkadiroglu & Tayfun Sönmez, 2003. "School Choice: A Mechanism Design Approach," American Economic Review, American Economic Association, American Economic Association, vol. 93(3), pages 729-747, June.
    2. David S. Lee & Thomas Lemieux, 2010. "Regression Discontinuity Designs in Economics," Journal of Economic Literature, American Economic Association, vol. 48(2), pages 281-355, June.
    3. Torsten Persson & Guido Tabellini, 2002. "Political Economics: Explaining Economic Policy," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262661314, December.
    4. Guido Imbens & Karthik Kalyanaraman, 2009. "Optimal Bandwidth Choice for the Regression Discontinuity Estimator," NBER Working Papers 14726, National Bureau of Economic Research, Inc.
    5. Fernando Ferreira & Joseph Gyourko, 2007. "Do Political Parties Matter? Evidence from U.S. Cities," NBER Working Papers 13535, National Bureau of Economic Research, Inc.
    6. Per Pettersson-Lidbom, 2008. "Do Parties Matter for Economic Outcomes? A Regression-Discontinuity Approach," Journal of the European Economic Association, MIT Press, MIT Press, vol. 6(5), pages 1037-1056, 09.
    7. Olle Folke, 2010. "Shades of brown and green: Party effects in proportional election systems," Working Papers 2010/25, Institut d'Economia de Barcelona (IEB).
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    Cited by:
    1. Kaisa Kotakorpi & Panu Poutvaara & Marko Terviö, 2013. "Returns to Office in National and Local Politics," CESifo Working Paper Series 4542, CESifo Group Munich.

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