Government fragmentation and fiscal deficits: a regression discontinuity approach

Abstract

Some electoral systems favor strong single-party majority governments, while others the formation of coalitions. Having one or the other is likely to affect economic outcomes in ways that are unintended when the electoral rules are approved. In this paper, we show that government fragmentation has large fiscal implications. We also provide results that have a causal interpretation. Using a panel of Spanish municipalities, along with a close-elections regression discontinuity design, we find that single-party majorities run budgets with a 1.5% point larger primary surplus than that of coalitions. In addition, we show that lower deficits are driven mainly by single-party majority governments' capacity to raise more revenues. These findings are robust to several model specifications.

Administrative Delegation of Budgetary Powers and Fiscal Performance

“…The indicator for Administrative Delegation with CMO is entered simultaneously two (-2) and one years (-1) before the procedure was implemented, at the time of implementation (0), and one and two years after implementation. Baskaran 2013;Artés & Jurado 2018). Edin andOhlsson (1991: 1601) show that such effects are "entirely due to minority governments" (see also Kontopoulos & Perotti 2002).…”

“…In this section, we investigate the mediating role of incumbent political support on the fiscal benefits of administrative delegation observed in Table 1 and Figure 3. Theoretically, we build on a substantial literature arguing that ‘weak’ governments tend to document worse fiscal performance (e.g., Roubini & Sachs 1989; Edin & Ohlsson 1991; Perotti & Kontopoulos 2002; Ashworth et al 2005; Baskaran 2013; Artés & Jurado 2018). Edin and Ohlsson (1991: 1601) show that such effects are “entirely due to minority governments” (see also Kontopoulos & Perotti 2002).…”

“…Whatever the effects of administrative delegation on fiscal performance, it can be expected that its benefits will be larger when political factors impose greater fiscal inefficiencies. From that perspective, it has been argued that fiscal performance is particularly undermined in political settings with sharp ideological divisions and/or ‘weakness’ in political decision‐making (the ‘Weak Government Hypothesis’; Roubini & Sachs 1989; Edin & Ohlsson 1991; Ashworth et al 2005; Baskaran 2013; Artés & Jurado 2018). Such situations – including coalition and minority governments – may thus also prompt the largest improvements in fiscal performance with administrative delegation in budgetary procedures.…”

“…For documentation of economic regions, see Statistics Norway: https://www.ssb.no/a/english/ publikasjoner/pdf/nos_c634_en/nos_c634_en.pdf Since Norway has a proportional representation electoral system, one might expect incumbent mayor support to be correlated with the level of political fragmentation in the local council. This might affect our findings since several studies have shown that political fragmentation impedes fiscal performance (e.g., Perotti & Kontopoulos 2002;Borge 2005;Ashworth et al 2005;Fabrizio et al 2006;Artés & Jurado 2018). Column (4) in Table A2 in the SI therefore includes the Herfindahl index of party concentration within the incumbent coalition as an additional control variable.…”

Tax reforms and Google searches: the case of Spanish VAT reforms during the great recession

“…A similar a approach is used inArtés and Jurado (2018). SeeCalonico et al (2017) for technical details regarding its implementation in Stata.6 We have considered alternative polynomial order to check for the sensitivity of our results (seeGelman and Imbens 2017).…”