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Do equalization payments affect subnational borrowing? Evidence from regression discontinuity

Monika Köppl Turyna and Hans Pitlik ()
Authors registered in the RePEc Author Service: Monika Irena Köppl-Turyna ()

MPRA Paper from University Library of Munich, Germany

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.

Keywords: fiscal autonomy; subnational borrowing; vertical fiscal imbalance; regression discontinuity (search for similar items in EconPapers)
JEL-codes: D72 D78 H74 H77 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ure
Date: 2016-09
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Related works:
Journal Article: Do equalization payments affect subnational borrowing? Evidence from regression discontinuity (2018) Downloads
Working Paper: Do Equalisation Payments Affect Subnational Borrowing? Evidence From Regression Discontinuity (2016) Downloads
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