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Government Turnover and External Financial Assistance

Andres Gago, Felipe Carozzi, Vicente J. Bermejo and Jose M. Abad

No 4655, Asociación Argentina de Economía Política: Working Papers from Asociación Argentina de Economía Política

Abstract: We study the political incentives shaping governments' decisions to seek assistance from a lender of last resort. We propose that re-elected incumbents are more reluctant than newly elected governments to request assistance, as this action reveals negative information about their past performance. We first provide cross-country descriptive evidence that a change in office is indeed associated with a larger probability of receiving assistance from the IMF. Next, to obtain causal evidence, we analyze the decisions made by 4,000 Spanish municipalities following a credit shock during the Great Recession. Regression-discontinuity estimates show that newly elected local executives were approximately 30 percentage points more likely than re-elected incumbents to publicly agree on a financing program with the national government. Using data from press reports, electoral results and a survey on politicians' views, we show that many re-elected incumbents avoided requesting a public bailout to protect their image, even though this decision was financially suboptimal.

JEL-codes: F34 H63 (search for similar items in EconPapers)
Pages: 64 pages
Date: 2023-11
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