Co-Partisan Buddies or Partisan Bullies? Why State Supervision of Local Government Borrowing Fails

Felix Rösel
Authors registered in the RePEc Author Service: Felix Roesel

No 189, ifo Working Paper Series from ifo Institute - Leibniz Institute for Economic Research at the University of Munich

Abstract: In many federal countries, local governments run large deficits, even when supervision by state authorities is tight. I investigate whether party alignment of mayors and supervisors influences local government borrowing. The dataset includes 427 local German governments over the period 1999–2012. I exploit variation of a far-reaching institutional reform that entirely re-distributed political powers on both debt issuance and supervision. The results show that short-term deficits of local governments are not enabled by a vertical “buddy” relationship between a mayor and a supervisor affiliated with the same party (co-partisanship) but rather by an ideological “bully behavior” of partisan supervisors and supervisees: left-wing local governments issue more debt, while left-wing supervisory authorities tolerate more debt. These findings imply that political independence for state supervisory authorities is highly recommended.

JEL-codes: H62 H74 H77 (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (2)

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