Who Seeks Re-Election: Local Fiscal Restraints and Political Selection

This paper analyses the consequences of local fiscal autonomy for political selection. We propose a model of political careers where both decisions to become candidates and seek re-election are endogenous. Market and political ability are private information, and the latter is revealed to the incumbent during her first period in office. Following an unanticipated reduction in the returns from holding office, we show that incumbents with high market ability are more likely to refrain from running again for office than their lower ability counterparts. We test this prediction exploiting an unexpected reduction in the upper bound of the municipal property tax rate, announced by the Portuguese Prime Minister in July 2008, just 15 months before the local elections. We rely on a comprehensive dataset on all Portuguese mainland municipalities for the 2005 and 2009 elections, including municipality and individual mayor characteristics. We follow a difference-in-differences strategy to show that affected mayors – those who were forced to decrease the property tax rate, and thus faced a sharp tax revenue decrease – are less likely to seek re-election. This effect is driven by high quality incumbents, as proxied by their previous occupation.