Do bailouts buy votes? Evidence from a panel of Hessian municipalities

Abstract

I study whether bailouts of local governments carry electoral benefits for state governments with a dataset covering 421 municipalities in the German state of Hesse over the period 1999-2011. I find that past bailouts have no economically significant effect on the municipality-level vote share of the parties that formed the state government in subsequent state elections. On the other hand, bailouts lead to vote increases for the ruling parties in subsequent local elections. On balance, these results suggest that electoral concerns are not the reason why central governments find it difficult to commit to a no-bailout policy.

Subnational borrowing and bailouts: When the federal government looks at the votes (differently) and its borrowing matters

“…However, as mentioned in Section 1, the guiding political forces behind bailouts seem to be beyond this simple extension. For instance, Baskaran (2013) points out that the positive impact of state bailouts takes shape in the support of local parties aligned with the governing parties at the state level. That is, state politicians do not seem to be the main beneficiaries of their decisions on local bailouts.…”

“…There might be several explanations for this, but all of them point to complex links between electoral incentives and federal decisions on grants. The paper by Baskaran (2013) focuses on voters: they might guess that voting for local politicians aligned with those in office at the state level improves their effectiveness in terms of securing grants for the municipality; alternatively, voters may well think that the best and most direct way to express gratitude is just to reward the local politicians.…”

“…The two novelties introduced here are related to the relevance of politics in deciding on grants and the federal intertemporal budget constraint when supporting other tiers of government. In the first case, Baskaran (2013) provides a good illustration of what we aim to highlight about the political economy of bailouts. He questions the direct effect of electoral considerations to guide federal decisions on discretionary grants to SNGs.…”

Political alignment and intergovernmental transfers in parliamentary systems: evidence from Germany

“…3 A related literature studies the electoral consequences of intergovernmental transfers, e. g. Levitt and Snyder (1997), Solé-Ollé and Sorribas-Navarro (2008), Litschig and Morrison (2009), and Baskaran (2013b). A different literature studies non-ideological determinants of transfers and/or development outcomes, such as the gender of a mayor (Brollo and Troiano, 2013) or the religious affiliation of a legislator (Bhalotra et al, 2014).…”

The Political Economy of Special Needs Transfers: Evidence from Bavarian Municipalities, 1993-2011

“…Another related study isBaskaran (2013). He studies the electoral consequences of bailouts in the German state of Hesse and finds that they are largely neutral.…”