Politicians’ Incentives and the Congested Budget Effect: Evidence from Italian Municipalities

Once in office, politicians propose policies and programmes aimed at winning the support of their constituencies. While this form of political activism increases with the number of politicians in government, it can also clash with capacity constraints, leading to a congestion effect whereby politicians’ plans are not enacted in practice. With novel data on Italian municipalities, we estimate the effect of the number of politicians on a battery of planned and actual budget outcomes. We leverage a reform that introduced a new temporary population threshold where the size of government bodies changed discontinuously and estimate treatment effects with a difference-in-discontinuities design. We find that more politicians plan to spend more but they do not do so in practice. The degree of this congestion decreases when bureaucratic capacity is high (i.e., larger share of bureaucrats with a university degree), suggesting administrative capacity deficits prevent politicians from implementing their proposed agenda.