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Political fragmentation and fiscal policy: Evidence from German municipalities

René Bernard

No 17-03, FiFo Discussion Papers - Finanzwissenschaftliche Diskussionsbeiträge from University of Cologne, FiFo Institute for Public Economics

Abstract: The government fragmentation hypothesis (GFH) states that coalition governments spend more than single-party governments due to an underlying common pool problem. Using a large panel data set on 604 local governments in the German state of Baden-Württemberg for the 1994-2014 period, I test the GFH for tax rates, the growth in government debt as well as expenditures and its sub-categories. Studies using standard regression methods fail to identify causal effect as the type of government is generally not random. I apply a RDD, that exploits quasi-random variation generated by close elections. I add external validity to the recent quasi-experimental literature by investigating the GFH for a mayor-council system. I find that contrary to the theoretical prediction, coalition governments do not increase taxes and government debt. There is a non-robust, negative effect on total expenditures, which is mainly driven by administrative expenditures and material expenditures.

Keywords: government fragmentation; common pool problems; legislative policy-making; government spending; local fiscal policy; local taxation; local elections; municipality data; regression discontinuity design; Fragmentierung der Regierung; Common Pool Problem; Gesetzgebung und politische Entscheidungsfindung; Staatsausgaben; kommunale Finanzpolitik; kommunale Steuern; Kommunalwahlen; Gemeindedaten; Regressions-Diskontinuitäts-Design (search for similar items in EconPapers)
JEL-codes: C21 D72 D78 H11 H71 H72 (search for similar items in EconPapers)
Date: 2017
New Economics Papers: this item is included in nep-cdm and nep-pol
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