A Test of the Rational Electoral-Cycle Hypothesis

This paper develops a three-step empirical methodology to test the rational electoralcycle hypothesis. The first step consists of testing for the existence of electoral cycles in fiscal policy. The second step conducts three tests for how such cycles should depend on election outcomes as suggested by recent political agency models. The third step is to regress electoral success on fiscal policy. This three-step approach is applied to a panel of Swedish local governments with more than 2000 observations from elections. The findings are as follows: (i) spending is raised and taxes are cut in the election year, (ii) in the election year, spending is higher for a government that will be re-elected as compared to those that will not be re-appointed, (iii) in the post-election year, spending is higher and taxes are lower for re-elected governments than for newly elected ones, (iv) reelected governments spend less and tax more in the post-election year as compared to the election year, (v) conditional on taxes, spending is positively related to electoral success. These set of findings are consistent with Rogoff’s equilibrium budget cycle model where a government signals its competence through cycles in fiscal policy.political agency; electoral budget cycles; accountability

Do Parties Matter for Fiscal Policy Choices? A Regression-Discontinuity Approach

This paper presents a method for measuring the causal effect of party control on fiscal policy outcomes. The source of identifying information comes from an institutional feature of the election system, namely that party control changes discontinuously at 50 percent of the vote share, i.e., a party that receives more than 50 percent of the votes will be in office. The approach is applied to a very large panel data set from Swedish local governments, which offers a number of attractive features. The results show that there is large and significant party effect: on average, left-wing parties spend and tax 2.5 percent more than right-wing governments. The party effect constitutes 1 percent of average municipality income, clearly a sizeable effect.political parties; party control; regression-discontinuity design

An Empirical Approach for Evaluating Soft Budget Constraints

In this paper, we develop an empirical framework for detecting the existence and estimating the magnitude of the softness of a budget constraint. The defining feature of a soft budget constraint is a subordinate organization’s expectations of being bailed out by a superior organization in case of financial trouble. This implies that one has to link the organization’s expectations for being bailed out to its fiscal behavior in order to quantify the extent of the soft budget constraint. We postulate that expectations for bailouts are formed rationally and make use of an instrumental variable method to get consistent estimates of the parameters of interest. We argue that past own experience of being bailed out and bailouts of other subordinate organizations can be used to construct credible instruments for the formation of bailout expectations. We apply our empirical approach to a unique panel data set of 286 Swedish local governments where the central government provided a total of 1,697 bailouts between 1974 and 1992. Our results strongly suggest the existence of a soft budget constraint; a local government increases its level of debt by 6-10 percent if it expects to be bailed out with probability one as compared to when the likelihood is zero due to previous experience of being bailed out, while the effect on debt from bailouts of its geographical neighbors is roughly four times as large.Soft budget constraint; Bailout; Fiscal distress; Intergovernmental relations

Does the Size of the Legislature Affect the Size of Government? Evidence from a Natural Experiment

Previous empirical studies have found a positive relationship between the size of the legislature and the size of government. Those studies, however, do not adequately address the concerns of endogeneity. In contrast, this paper exploits an exogenous variation in the size of the legislature induced by a statutory law linking council size to the number of eligible voters in Swedish local governments. The statutory law can potentially create discontinuities between number of eligible voters and council size at certain known values. These discontinuities are used to construct instrumental variable estimates of the effect of council size on government size. In contrast to previous findings, the results show that an increase of the council size leads to a statistically and economically significant decrease in spending and revenues. On average, spending and revenues are decreased by roughly 0.5-0.8 percent for each additional council member.government size; legislature; regression-discontinuity design; natural experiment

Does child spacing affect children’s outcomes? Evidence from a Swedish reform

In this paper, we provide evidence of whether child spacing affects the future success of children. As an exogenous source of variation in child spacing, we make use of the introduction of an administrative rule in the parental leave benefit system in Sweden. This rule made it possible for a woman to retain her previous high level of parental leave benefits, i.e., 90 percent wage replacement, without entering the labor market between births provided that the interval between the births did not exceed 24 months. The rule had a much larger effect on the birth spacing behavior for native-born mothers compared to foreign-born mothers due to their differential attachment to the labor market. We find that the rule caused a reduction in spacing among native-born mothers as compared to the foreign-born mothers. For individuals born by native-born mothers, the reform also caused a decrease in educational attainment. Thus, this suggests that the effect of spacing children closer has a negative impact on children’s future outcomes. We provide additional evidence that this is likely due to the strong effects of early environment on the capacity for human skill development as discussed by Knutsen et al. (2006).Child spacing; parental leave; child school performance

Does the Size of the Legislature Affect the Size of Government? Evidence from Two Natural Experiments

Previous empirical studies have found a positive relationship between the size of legislature and the size of government. Those studies, however, do not adequately address the concerns of endogeneity. In contrast, this paper uses variation in legislature size induced by statutory council size laws in Finland and Sweden to estimate the causal effect of legislature size on government size. These laws create discontinuities in council size at certain known thresholds of an underlying continuous variable, which make it possible to generate ?near experimental? causal estimates of the effect of council size on government size. In contrast to previous findings, I find a negative relationship between council size and government size: on average, spending and revenues are decreased by roughly 0.5 percent for each additional council member.Aiempien tutkimusten mukaan julkisten päätöksenteko-organisaatioiden koon kasvu aiheuttaa julkisten menojen kasvua. Siten kansanedustajien tai kunnanvaltuutettujen määrän kasvu lisäisi julkisia menoja. Tutkimuksissa ei kuitenkaan ole huomioitu sitä, että suuri julkinen sektori kasvattaa myös päätöksenteko-organisaatioiden kokoa. Tämän endogeenisuusongelman poistaminen on tämän tutkimuksen keskeinen tavoite. Tutkimuksen aineisto koostuu Suomen ja Ruotsin kunnanvaltuustojen kokotiedoista. Valtuustojen kokoa säätelevät lait, joiden mukaan tietyn asukaskokoluokan kunnissa on oltava tietty määrä valtuutettuja. Säännöstö antaa mahdollisuuden testata valtuustojen koon muutoksen vaikutusta julkisiin menoihin tilanteessa, jossa kunnan asukasluku kasvaa vain vähän. Tulosten mukaan valtuuston koon ja menojen välillä on negatiivinen yhteys. Siten yhden uuden valtuutetun tulo valtuuston jäseneksi pienentää kunnan menoja ja tuloja keskimäärin noin 0,5 prosenttia

Distributive Politics and Electoral Incentives: Evidence from Seven US State Legislatures A comment

In this comment, I show that the results of Aidt and Shvets (forthcoming) do not hold up when the panel properties of their data are properly taken into account. This paper is a comment on Aidt and Shvets, forthcoming in this journal. They study the effect of electoral incentives on the allocation of public services across legislative districts in where i denotes a legislator, j a state, and t a year. The outcome y ijt denotes the per capita transfer to the district of legislator i from the state budget in state j in year t. The variable last term is a dummy variable equal to one if a legislator is in his last allowed term under the term limit laws of the state and zero otherwise. α i is a legislator fixed effect, υ jt is a state-specific year effect, and ε ijt is an error term. The parameter of interest is γ-the last term effectwhich is predicted to be positive. The problem with specification (1) is that it does not take into account three important, and by now well-known issues, in panel data or difference-in-difference analyses, namely (i) serial correlation in the errors, (ii) functional form issues, and (iii) omitted confounding factors at the district level. Starting with the problem of serial correlation

An Empirical Investigation of the Strategic Use of Debt

The paper examines the accumulation of debt by Swedish local governments. I find that right-wing governments accumulate more debt when facing a higher probability of defeat, whereas the opposite occurs for left-wing governments. These effects are sizable: a right-wing government increases its level of debt by 15 percent, whereas a left-wing government decreases its debt by 11 percent if they are both certain of being replaced as compared to when they are certain of remaining in office. The results are consistent with the predictions from a strategic debt model developed by Persson and Svensson.