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Published in: Public Choice 3-4/2024

13-12-2023

Manipulating municipal budgets: unveiling opportunistic behavior of Italian mayors

Authors: Emanuele Bracco, Marco Alberto De Benedetto, Maurizio Lisciandra

Published in: Public Choice | Issue 3-4/2024

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Abstract

We examine the political budget cycle hypothesis using revenue data from Italian municipal administrations. By leveraging on the staggered schedule of local elections and employing a difference-in-differences strategy, we find evidence of opportunistic behavior by mayors. In pre-election years, mayors reduce total accrued revenues from municipal solid waste fees and property taxes, which are the primary sources of revenue in municipal financial statements. Non-term-limited mayors who seek re-election engage in such opportunistic behavior, while those facing a binding term limit do not manipulate revenues for electoral purposes. Our findings remain robust across various specifications and controls. Heterogeneity analysis suggests that the observed results are primarily driven by smaller municipalities, as well as by those situated in the South of Italy that exhibit low levels of social capital. Mayors employing political budget cycles also strategically offset reductions in highly salient fees and taxes by raising less salient non-tax revenues. This study contributes to the understanding of political budget cycles in the context of Italian municipal administrations and has implications for the broader literature on electoral behavior and public finance.

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Footnotes
1
Since 2002, municipalities with populations below a specified threshold have been exempted from certain fiscal constraints. This threshold has evolved over time: from 2002 to 2004, the population limit was set at 3,000; from 2005 to 2012, it increased to 5,000; and as of 2013, the threshold has been reduced to 1,000.
 
2
Starting in 2009, as mandated by Law 189/2008, municipalities were required to approve and report their financial statements within the period from April 30 to June 30.
 
3
To prevent issues with zero values, which might arise from balance-sheet information misreporting by administrative staff, we have recoded MSW fee revenues, property tax revenues, and transfers as missing.
 
4
As a result, accrual accounting has seen increasing adoption by governments across various administrative levels worldwide, as it is believed to offer a more accurate depiction of a government’s financial situation while facilitating better assessments of present and future risks (Cohen 2012).
 
5
The estimator suggested by Callaway (2021) is not appropriate for our case for two reasons: (1) it precludes the inclusion of covariates in the model, and (2) it is only applicable to DiD setups where treated units maintain their treated status in subsequent periods. Additionally, Sun (2021)’s approach is tailored to interpret estimates from two-way fixed effects specifications exclusively when "dynamic" indicators pertaining to the time relative to treatment are incorporated. Consequently, we choose to employ the more general DiD estimator developed by de Chaisemartin et al. (2019) and de Chaisemartin (2022), which addresses potential issues arising from negative weights and is suitable for both "static" and "dynamic" specifications of TWFE.
 
6
We employ the twowayfeweights command, as devised by de Chaisemartin et al. (2019) and de Chaisemartin (2022).
 
7
A key assumption of the DiD approach is that in the absence of treatment, the evolution of our outcome across municipalities would have proceeded along parallel trajectories. We recognize that examining outcome differences in pre-electoral years does not work as a placebo in our context, since the comparison is within the same municipality over time, by controlling for municipal-year fixed effects. Still, the diagnostic test in Table 2, panel (a), revealing a very small fraction of negative weights, underscores the robustness of TWFE estimates to heterogeneity across municipalities and over time.
 
8
Specifically, we applied the “dynamic_robust” approach in Stata. In other words, we allowed the dynamic estimator to contrast the outcome evolution of first-time switchers with those yet to switch. This comparison extends from the last period before the first-time switchers’ treatment changes to the \(l^{th}\) period following that change.
 
9
A key assumption of the DiD approach is that in the absence of treatment, the evolution of our outcome across municipalities would have proceeded along parallel trajectories. We recognize that examining outcome differences in pre-electoral years does not work as a placebo in our context, since the comparison is within the same municipality over time, by controlling for municipal-year fixed effects. Still, the diagnostic test in Table 2, panel (a), revealing a very small fraction of negative weights, underscores the robustness of TWFE estimates to heterogeneity across municipalities and over time.
 
10
Specifically, we applied the “dynamic_robust” approach in Stata. In other words, we allowed the dynamic estimator to contrast the outcome evolution of first-time switchers with those yet to switch. This comparison extends from the last period before the first-time switchers’ treatment changes to the \(l^{th}\) period following that change.
 
11
The observation that MSW fee and property tax revenues may be lower in the year following the election compared to the election year itself is not entirely unexpected. The full impact of adjustments to MSW fees and property tax rates typically materializes in the second half of the year, i.e., post-election. This temporal dynamic renders not only the year preceding the election but also the year succeeding it as potentially more consequential than the election year itself. After securing electoral victory, incumbents may perceive that they have both a mandate and ample political capital to enact fiscal measures that are more favorable to residents. Such a scenario could involve a strategic rebalancing, wherein the incumbent opts to reduce these fees and taxes, accepting a constrained budget as a trade-off for fulfilling electoral promises or enhancing public sentiment. It is, however, crucial to emphasize that the coefficients corresponding to the year following the election are not statistically significant at conventional levels.
 
12
Under Law n. 56 of April 2014, mayors in municipalities with fewer than 3,000 residents are now eligible for a third term. This legislative change was prompted by the challenges small municipalities faced in securing qualified candidates for the mayoral office.
 
13
The property tax bill is calculated as the product of the land-registry value and the applicable tax rate. For owner-occupants, a tax allowance set by the central government is also factored in, potentially introducing non-linear relationships between tax rates and tax revenues. However, it should be noted that most owner-occupants are fully exempt from this tax. While tax revenues encapsulate the entire array of policy instruments available to a mayor—including varying tax rates for different categories, tax allowances, and exemptions—tax rates may serve as a more effective metric for examining "headline" policies, which often assume a prominent role in electoral campaigns.
 
14
We decided to omit these political controls from our primary specification, given that pertinent data is available for merely 80% of the elections within our dataset.
 
15
The complete results from all robustness checks, including tables and additional information, can be provided upon request.
 
16
We additionally examined two alternative indicators: provincial voter turnout for the divorce referendum and voter turnout for all Italian referendums between 1946 and 1989. The findings are strikingly consistent with those discussed in the main body of the paper and can be provided upon request. However, several factors informed our choice towards blood donation. Notably, in 2004, 2009, and 2014, European Parliament elections coincided with municipal ones, boosting turnout due to the perceived importance of municipal elections by Italian voters. This overlap could distort turnout as a standalone proxy for social capital. Additionally, we preferred a social capital measure established before our sample’s starting year to sidestep unexpected behavioral influences. Moreover, our chosen measure is well-validated in prior research (e.g., Nannicini et al. 2013).
 
17
As for the composition of municipal spending, the results (not reported here but available upon request) show that there is no PBC on current expenditures. However, in the year before the election, capital expenditures per capita increase by 6.95%. This increase in spending does not seem to be financed by either own revenues or transfers from the central government or regions (as no political cycle emerged from our analyses), suggesting that Italian municipalities tend to increase their level of debt before elections.
 
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Metadata
Title
Manipulating municipal budgets: unveiling opportunistic behavior of Italian mayors
Authors
Emanuele Bracco
Marco Alberto De Benedetto
Maurizio Lisciandra
Publication date
13-12-2023
Publisher
Springer US
Published in
Public Choice / Issue 3-4/2024
Print ISSN: 0048-5829
Electronic ISSN: 1573-7101
DOI
https://doi.org/10.1007/s11127-023-01131-3

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