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Do equalization payments affect subnational borrowing? Evidence from regression discontinuity

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  • Köppl–Turyna, Monika
  • Pitlik, Hans

Abstract

According to the fiscal federalism literature, subcentral budget constraints become softer when local governments are more dependent on revenues over which they have no discretion. As a consequence of ‘transfer dependency’, subcentral governments can expect to be bailed out by the central government and therefore tend to accumulate higher levels of debt. We test this conjecture with data from Austrian municipalities. In fiscal terms, Austria is a highly centralized federation in which tax autonomy at the municipal level is rather weak. Our identification strategy is based on a discontinuity caused by the unique regulation of population weights in the tax-sharing agreement between central government and the municipalities. Our results indicate that, in line with theoretical expectations, municipalities with higher revenue dependency are responsible for higher net borrowing per capita. The size of the additional borrowing effect equals to about 5% of average municipal debt. We also find that almost one half of the observed discontinuity works through an investment channel.

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  • Köppl–Turyna, Monika & Pitlik, Hans, 2018. "Do equalization payments affect subnational borrowing? Evidence from regression discontinuity," European Journal of Political Economy, Elsevier, vol. 53(C), pages 84-108.
  • Handle: RePEc:eee:poleco:v:53:y:2018:i:c:p:84-108
    DOI: 10.1016/j.ejpoleco.2017.07.002
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    More about this item

    Keywords

    Fiscal autonomy; Subnational borrowing; Vertical fiscal imbalance; Regression discontinuity;
    All these keywords.

    JEL classification:

    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
    • D78 - Microeconomics - - Analysis of Collective Decision-Making - - - Positive Analysis of Policy Formulation and Implementation
    • H74 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Borrowing
    • H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism

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