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

  • Ronny Freier
  • Christian Odendahl
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    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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    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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    1. Per Pettersson-Lidbom, 2008. "Do Parties Matter for Economic Outcomes? A Regression-Discontinuity Approach," Journal of the European Economic Association, MIT Press, vol. 6(5), pages 1037-1056, 09.
    2. David S. Lee & Thomas Lemieux, 2009. "Regression Discontinuity Designs in Economics," NBER Working Papers 14723, National Bureau of Economic Research, Inc.
    3. Olle Folke, 2010. "Shades of brown and green: Party effects in proportional election systems," Working Papers 2010/25, Institut d'Economia de Barcelona (IEB).
    4. repec:clu:wpaper:0203-18 is not listed on IDEAS
    5. Torsten Persson & Guido Tabellini, 2002. "Political Economics: Explaining Economic Policy," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262661314, June.
    6. Fernando Ferreira & Joseph Gyourko, 2007. "Do Political Parties Matter? Evidence from U.S. Cities," NBER Working Papers 13535, National Bureau of Economic Research, Inc.
    7. Guido Imbens & Karthik Kalyanaraman, 2010. "Optimal bandwidth choice for the regression discontinuity estimator," CeMMAP working papers CWP05/10, Centre for Microdata Methods and Practice, Institute for Fiscal Studies.
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