Preventing Local Government Defaults:No-Bailout Policy and Its Alternatives

Fiscal decentralization introduces the risk that subnational governments act fiscally irresponsible in the belief that a higher government will bail them out if they run into trouble. The economic literature therefore prescribes a strict no-bailout policy. We survey fiscal rules and fiscal policies concerning subnational governments in 20 European countries, and find wide discrepancies, both between theory and practice and between rules and actual policies. Countries with a no-bailout rule often do bail out subnational governments, sometimes on a large scale, while countries lacking such a rule sometimes do not, or only sparingly. Fiscally responsive behavior of subnational governments seems to depend on a balanced mix of policy measures, notably providing sufficient funding, adequate fiscal supervision, early intervention mechanisms and bailout rules that are sufficiently unattractive. A no-bailout rule is neither necessary nor sufficient

When are parties punished for serving in a coalition government?

Many empirical studies find that parties in government on average lose votes. However, few studies take into account that this cost of ruling may not be uniform across parties. Those that do present dissimilar results. We investigate whether characteristics of parties and coalitions mediate the effect of party incumbency on local election results. Using a large panel data set on municipal elections in the Netherlands enables us to control carefully for omitted variables. We find that the cost of ruling decreases with the number of coalition parties, and after four or more consecutive terms in office. These results are consistent with the grievance asymmetry theory. However, other results remain unexplained by existing theories. One example is the finding that some (niche) parties actually gain seats after incumbency. Thus, there seems to be a need for more refined theorizing