Distance matters: Geographical proximity and fiscal rules enforcement

Désirée Christofzik and Oliver Märtz

No 26-008, ZEW Discussion Papers from ZEW - Leibniz Centre for European Economic Research

Abstract: A reform in the German state of Hesse selectively shifted the responsibility for overseeing and enforcing a balanced budget rule at the municipal level. Oversight was transferred from politically affiliated county administrators to non-political and potentially more impartial fiscal supervisors at a higher administrative layer. We use this institutional change to empirically examine whether enforcement under the former regime was affected by hidden bias related to geographic proximity. We find that municipalities located closer to the former political supervisors reduced their cash loans more strongly under the subsequent neutral regime, consistent with the existence of proximity-related favoritism prior to the reform. This spatial pattern is most evident for smaller municipalities, when supervisors oversee more municipalities, and when mayors and supervisors are not politically aligned.

Keywords: fiscal oversight; fiscal rules; balanced budget rule; local government debt (search for similar items in EconPapers)
JEL-codes: D73 H71 H77 H83 (search for similar items in EconPapers)
Date: 2026
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:zewdip:338092

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