Monitoring Mechanisms and Budget Variances: Evidence from the 50 Largest US Cities

I examine how the association between the current period’s budget variance and the subsequent period’s budget is affected by various governmental monitoring mechanisms. Specifically, I consider the following governance and monitoring mechanisms: governance structure, state/city budget-limiting regulations, and voter-initiated monitoring. I find that city budgets ratchet in the top 50 populous cities in the US. I also document evidence of asymmetric ratcheting—the current period’s favorable budget variances result in budget increases in the following year that are larger than the decreases associated with unfavorable variances of the same magnitude. Consistent with the political budget cycle hypothesis that budget pattern alters during pre-election periods, I find the asymmetric ratcheting pattern becomes invisible in times of election, particularly when an incumbent runs for re-election. Given this evidence of the opportunistic budgetary pattern, I hypothesize and find that some monitoring mechanisms mitigate the sensitivity of the subsequent period’s budget with respect to the current period’s budget variance.