Social and/or political involvement within the population is often argued to enhance public sector performance. The underlying idea is that engagement fosters political awareness and interest and increases the public's monitoring ability. Still, weak fiscal autonomy can undermine voters' interest in and demand for an efficient production of public services. In our contribution, we test whether and how voter involvement in the political sphere is related to government performance -in terms of its efficiency -using a broad panel of German municipalities. Our results suggest that voter involvement indeed has a positive impact on cost efficiency. Crucially, however, this efficiency-enhancing effect of voter involvement is significantly positively affected by local governments' fiscal autonomy.

In this paper, we investigate the cost efficiency of German local governments in the state of Baden-Württemberg in 2004 using a stochastic frontier approach. Besides being the first study on German data, we add two elements to the literature. First, we provide a comparative perspective, allowing us to embed our results in the broader literature. Second, unlike most previous studies, we explicitly account for exogenous or non-discretionary influences when estimating municipal efficiency scores. The results suggest that disregarding such exogenous factors can lead to significant and systematic bias in the estimated inefficiency levels. Particularly, underestimation of efficiency occurs for municipalities with high tourist activity, while the reverse is true for municipalities with high unemployment.

We implement a meta-regression-analysis for the budgetary impact of numerical fiscal rules based on 30 studies published in the last decade. The existing empirical evidence points to a constraining effect of rules on fiscal aggregates. However, this seemingly optimistic message is strongly weakened as our analysis points to a bias if the potential endogeneity of fiscal rules is not explicitly taken into account. Furthermore, our analysis provides evidence for the presence of a publication bias. Both sources of bias reduce the statistical precision of obtained effects below usual levels of statistical significance. In addition, we offer suggestive evidence for the effect size based on a small coherent sub-sample and provide recommendations for future research on the budgetary impact of fiscal rules.

Die Dis cus si on Pape rs die nen einer mög lichst schnel len Ver brei tung von neue ren For schungs arbei ten des ZEW. Die Bei trä ge lie gen in allei ni ger Ver ant wor tung der Auto ren und stel len nicht not wen di ger wei se die Mei nung des ZEW dar.Dis cus si on Papers are inten ded to make results of ZEW research prompt ly avai la ble to other eco no mists in order to encou ra ge dis cus si on and sug gesti ons for revi si ons. The aut hors are sole ly respon si ble for the con tents which do not neces sa ri ly repre sent the opi ni on of the ZEW.

Die Dis cus si on Pape rs die nen einer mög lichst schnel len Ver brei tung von neue ren For schungs arbei ten des ZEW. Die Bei trä ge lie gen in allei ni ger Ver ant wor tung der Auto ren und stel len nicht not wen di ger wei se die Mei nung des ZEW dar.Dis cus si on Papers are inten ded to make results of ZEW research prompt ly avai la ble to other eco no mists in order to encou ra ge dis cus si on and sug gesti ons for revi si ons. The aut hors are sole ly respon si ble for the con tents which do not neces sa ri ly repre sent the opi ni on of the ZEW.Download this ZEW Discussion Paper from our ftp server:ftp://ftp.zew.de/pub/zew-docs/dp/dp08024.pdf Non-Technical SummaryOver the last 15 years, a rapidly-expanding body of literature has developed in which it is argued that 'social capital' positively affects institutional performance. Engagement in social life is argued not only to increase interest in and understanding of politics, but also to make one more willing and effective in demanding 'good' government. Clearly, however, two crucial assumptions have to be met for this argument to hold. Firstly, social engagement should foster political awareness and interest. Secondly, this increased interest and involvement in the political sphere should increase the performance of the incumbent government. While there are several researchers who provide evidence for the first assumption, the validity of the second assumption has received much less attention thus far.The present paper takes a first step to bridge this gap. Using a broad panel of German municipalities we empirically investigate whether voters' political involvement which can be interpreted as a specific facet of the 'social capital complex' improves government performance. We thereby define good government performance as higher efficiency of public service provision or, more negatively, as a reduction in budgetary slack or rent-seeking. The efficiency measure employed is based on the public sector as a whole, rather than concentrating on efficiency in a given area of public good provision: e.g. waste collection, administration, road maintenance, and so on. Moreover, we assess how the participationefficiency nexus is affected by the degree of local fiscal autonomy. Fiscal autonomy is a crucial intervening variable since it implies that voters are effectively confronted with the tax bill for their desires.The empirical results show that higher voter involvement -measured by (1) voter turnout, (2) the existence of so called 'free voter unions' in the local council (=local political associations that explicitly reject the idea of being linked to one of the traditional political ideologies), and (3) the ratio of eligible voters to total population -is indeed associated with increased government (technical) efficiency. Moreover, in line with our theoretical predictions, this effect is stronger in communities that have a higher degree of fiscal autonomy. One explanation for the last result is that an active citizenry is likely to put more weight on the careful...

The official view on ECB monetary policy claims that monetary decisions are based solely on average data for the euro zone and that diverging regional developments are disregarded. However, experience from other two tier central banks and theoretical considerations suggest that this official view cannot be accepted without empirical testing. A generalised monetary policy reaction function is developed which allows for an influence of regional divergence. The empirical tests are based on reaction function estimations and a probit model of interest rate decisions for the first years of the euro area. The results offer some first weak support for an impact of regional divergence in ECB decision making. The results further clarify that ignoring a potential national perspective may lead to a serious bias in the estimation of ECB reaction functions. The paper concludes that the correct identification of a possible impact of regional divergence is important for the transparency issue. JEL-Classification: E 58

Die Dis cus si on Pape rs die nen einer mög lichst schnel len Ver brei tung von neue ren For schungs arbei ten des ZEW. Die Bei trä ge lie gen in allei ni ger Ver ant wor tung der Auto ren und stel len nicht not wen di ger wei se die Mei nung des ZEW dar.Dis cus si on Papers are inten ded to make results of ZEW research prompt ly avai la ble to other eco no mists in order to encou ra ge dis cus si on and sug gesti ons for revi si ons. The aut hors are sole ly respon si ble for the con tents which do not neces sa ri ly repre sent the opi ni on of the ZEW. Non-technical summaryThe credibility crisis regarding the sustainability of public debt has transformed the markets for government bonds in the Euro area. A new sensitivity of creditors for the risk of sovereign default has pushed up financing costs of several euro member countries or has even cut them off from market access. Currently, policy makers try to enhance their fiscal reputation through the establishment of better European and national fiscal rules, particular in form of the debt brakes prescribed by the European Fiscal Compact. The hope is that, independent from the current budgetary performance, new fiscal rules send out credible signals to the markets and cut short the way towards lowering the risk spread.In our paper we study the determinants of sovereign risk premia in the EU countries between 1992 and 2008. Our contribution addresses two interrelated questions: First, do fiscal rules impact on sovereign risk premia in Europe? And second, is any such observable link really causal or rather the consequence of different national "stability cultures", which arise from differing historical institutions or fiscal preferences?In our empirical analysis, we try to shed light on this issue by employing several types of stability preference related proxies. These proxies are related to a country's past stability performance, government characteristics and survey results related to general trust. We find evidence that these indicators have an influence on risk premia. Moreover, they dampen the measurable impact of fiscal rules on risk premia. The estimated positive effect of fiscal rules on market confidence in the early years of EMU can thus mainly be explained by the fact that mainly high-stability countries introduced such constraints. Our results indicate that these stability-oriented countries would not have had a significantly lower financial market reputation if they had not established fiscal rules. Thus, for these countries strict fiscal rules may be rather interpreted as a confirmation of the underlying fiscal preferences of the voters and their political representatives. Still, even if this is true, it does not preclude the possibility that the new establishment of strict rules -such as intended by the Fiscal Compact -is relevant for fiscal reputation in countries with a lack of historical stability orientation. Our results rather point to the fact that fiscal rules have the largest potential for countries with particularly poor stability culture ...

The official view on ECB monetary policy claims that monetary decisions are based solely on average data for the euro zone and that diverging regional developments are disregarded. However, experience from other two tier central banks and theoretical considerations suggest that this official view cannot be accepted without empirical testing. A generalised monetary policy reaction function is developed which allows for an influence of regional divergence. The empirical tests are based on reaction function estimations and a probit model of interest rate decisions for the first years of the euro area. The results offer some first weak support for an impact of regional divergence in ECB decision making. The results further clarify that ignoring a potential national perspective may lead to a serious bias in the estimation of ECB reaction functions. The paper concludes that the correct identification of a possible impact of regional divergence is important for the transparency issue. JEL-Classification: E 58