Strategic Bankruptcies. Do Smart Politicians Do It Better?

Massimo Bordignon, Davide Cipullo and Gilberto Turati

No 11930, CESifo Working Paper Series from CESifo

Abstract: We study the reaction of low vs. high-skilled politicians to a reform, approved in Italy in 2011, that introduces stringent individual financial and career sanctions to local administrators who are judged responsible for their municipality’s bankruptcy. To this aim, we leverage exogenous variation induced by close elections between a mayoral candidate who holds a college degree and a mayoral candidate who does not. After the introduction of sanctions, skilled politicians tend to declare bankruptcy with a higher probability than low-skilled politicians. The effect is concentrated in municipalities in which the financial state of distress was not advocating for a bankruptcy. Our findings document that individual sanctions against politicians may backfire if strategic considerations are not taken into account properly.

Keywords: soft budget constraint; bankruptcy; municipalities; intergovernmental relations; mayors; political selection (search for similar items in EconPapers)
JEL-codes: H63 H72 H74 (search for similar items in EconPapers)
Date: 2025
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