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Political fragmentation and fiscal policy: Evidence from German municipalities

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  • Bernard, René

Abstract

The government fragmentation hypothesis (GFH) states that coalition governments spend more than single-party governments due to an underlying common pool problem. Using a large panel data set on 604 local governments in the German state of Baden-Württemberg for the 1994-2014 period, I test the GFH for tax rates, the growth in government debt as well as expenditures and its sub-categories. Studies using standard regression methods fail to identify causal effect as the type of government is generally not random. I apply a RDD, that exploits quasi-random variation generated by close elections. I add external validity to the recent quasi-experimental literature by investigating the GFH for a mayor-council system. I find that contrary to the theoretical prediction, coalition governments do not increase taxes and government debt. There is a non-robust, negative effect on total expenditures, which is mainly driven by administrative expenditures and material expenditures.

Suggested Citation

  • Bernard, René, 2017. "Political fragmentation and fiscal policy: Evidence from German municipalities," FiFo Discussion Papers - Finanzwissenschaftliche Diskussionsbeiträge 17-03, University of Cologne, FiFo Institute for Public Economics.
    • Handle: RePEc:zbw:uoccpe:1703
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    JEL classification:

    • C21 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models
    • 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
    • H11 - Public Economics - - Structure and Scope of Government - - - Structure and Scope of Government
    • H71 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Taxation, Subsidies, and Revenue
    • H72 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Budget and Expenditures

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