Do equalization payments affect subnational borrowing? Evidence from regression discontinuity

Abstract

According to the fiscal federalism literature sub-central budget constraints become softer when local governments are more dependent on revenues over which they have no discretion. As a consequence of higher 'transfer-dependency', sub-central governments can expect to be bailed out by the central government and therefore tend to accumulate higher levels of debt. We test this conjecture with data from Austrian municipalities. Austria is a fiscally highly centralized federation in which tax autonomy at the sub-central level is almost absent. Our identification strategy is based on a discontinuity caused by a special regulation on population weights in the tax sharing agreement between central government and the municipalities. We analyze the discontinuity in the conditional expectation of borrowing given population size to unveil an average causal effect of the treatment. Our results indicate that in line with theoretical expectations municipalities with higher revenue dependency observe higher net borrowing per capita. We also find that almost one half of the observed discontinuity works through an investment channel. Net borrowing is spatially correlated.

Determinants of Public‐Sector Efficiency: Decentralization and Fiscal Rules

“…The empirical literature seems to confirm the validity of such claims. It has been shown that diverse fiscal outcomes are affected by decentralization through diverse channels: reducing excessive spending (as in Jin and Zou, ; Cassette and Paty, ; Ashworth et al, ; Prohl and Schneider, ), reducing excessive borrowing (as in Goodspeed, ; Sorens, ; Köppl‐Turyna and Pitlik, ), affecting the subnational tax base due to the“flypaper effect” (in line with Rodden, ), or through the efficiency of public goods provision (along the lines of Oates, ; Tiebout, ). Decentralization has also been found to affect responsiveness to expenditure needs (see, e.g., Faguet, ; Borge et al, ) and composition of public spending Alegre (); Borge et al ().…”

“…This results in high vertical fiscal imbalances, which in turn create incentives to overspend at the regional or local level. Transfer dependency of local authorities has been shown to increase borrowing (see, e.g., Köppl‐Turyna and Pitlik, ). Evidence of the effect on expenditure in the cross‐country context (Jin and Zou, ; Cassette and Paty, ; Ashworth et al, ; Prohl and Schneider, ) and intra‐country studies with clear identification strategies (Dahlberg et al, ; Gordon, ) points to vertical imbalances, in turn increasing public expenditure.…”

Vertical fiscal imbalance and local fiscal indiscipline: Empirical evidence from China

“…However, some level of VFI can be vital for the central government to achieve certain political and economic objectives (Dahlby, 1996;Boadway and Keen, 1996). Yet, the main criticism leveled against it in the (partial) fiscal decentralization literature is that high VFI levels and thus its corollary, the heavy reliance on fiscal transfers, may lead to local fiscal indiscipline in the form of overspending or lowering local governments' tax effort (e.g., Stein, 1999;Velasco, 2000;Borge and Rattsø, 2002;Rodden et al, 2003;Eyraud and Lusinyan, 2013;Ben-Bassat et al, 2016;Köppl-Turyna and Pitlik, 2018). Two arguments pinpoint this concern.…”

The Effect of Constitutional Provisions on Education Policy and Outcomes

“…In this regard, our paper is related to Akee, Jorgensen, and Sunde (2015), who exploit differences in the party of US president at the time American Indian tribes adopted a written constitution for the first time to study long-run economic development. In examining impact of changes in form of government or electoral rules on fiscal outcomes, there are some recent papers that use natural experiments at the municipality level to show causal effects (Ade (2014) in Germany; Hinnerich and Pettersson-Lidbom (2014) in Sweden; Köppl-Turyna and Pitlik (2018) in Austria; and Kantorowicz (2017); Kantorowicz and Köppl-Turyna (2019) in Poland).…”