Do bailouts buy votes? Evidence from a panel of Hessian municipalities

Baskaran and Hessami (2012) even suggest that bailout expectations might have been partially responsible for the recent debt crises in several EU countries.

While the legislative period before the election in 2001 did last from 1997–2000, I only consider bailouts paid from 1999 onwards because the ideology of the state government changed after the state election of 1999. When voting at the local election in 2001, therefore, voters should associate bailouts before 1999 not with the incumbent state government but rather with the opposition parties, i.e. the parties that had formed the state government before 1999.

A related literature studies whether the regional allocation of general intergovernmental transfers can be explained by political variables. Arulampalam et al. (2009) show that political alignment and the existence of swing voters is important for the amount of transfers that Indian regions receive from the central government. Dahlberg and Johansson (2002), Johansson (2003) and Brollo and Nannicini (2012) obtain similar results by studying discretionary grants paid by the Swedish and Brazilian central governments to their municipalities, respectively. A limited number of papers study whether local incumbents benefit in municipal elections from general transfers (Solé-Ollé and Sorribas-Navarro 2008; Litschig and Morrision 2009). The electoral consequences of general federal transfers for incumbent representatives in US House elections have been explored by Levitt and Snyder (1997).

They technically do not choose a rate but rather a tax factor that is multiplied with a federation-wide base rate. However, the tax factor determines the effective tax rate. Note that from 2003 onwards, municipalities may not choose less than a minimum tax factor for the business tax throughout the federation.

However, Litschig (2012) shows with Brazilian data that even formula-based transfer programs can be subject to political manipulation.

See e.g.

Geißler (2009) questions whether the Bedarfszuweisungen are bailouts from a legal viewpoint. He argues that these transfers are not bailouts because the Landesausgleichsstock is technically part of the municipal equalization scheme. Therefore, the resources out of this fund belong in legal terms to the sphere of municipal revenues. Nevertheless, that the state government ultimately decides discretionarily on whether a municipality is entitled to Bedarfszuweisungen implies that they are bailouts from an economic viewpoint.

The extension was approved by a popular referendum in 2002. Two arguments were made in favor of this extension (Hessischer Landtag 2002). First, as most other German States had a 5-year legislative period, Footnote 10 continued the extension would bring Hesse in line with the rest of the federation. Second, the extension would give the state government and state parliamentarians more time to govern without being distracted by a looming election.

The relevant votes are called second vote because voters can cast two votes in state elections. The “first-vote” is only marginally important for the allocation of seats.

More specifically, I have data on bailouts from 1997 to 2011. I neglect the bailouts in 1997 and 1998 as the state government was formed by a SPD-Green Party coalition prior to 1999. I also do not use the bailout data after 2008 in the state election regressions. In a nutshell, the state election of 2008 resulted in a hung parliament. The right-wing parties were unable to form a government with majority support in the state parliament. A left-wing majority was technically possible. However, in its effort to achieve a stable coalition the SPD leadership in Hesse made some deeply unpopular decisions. Yet, it failed nonetheless to form a government. New elections where held in 2009 and resulted in a CDU–FDP victory and large losses for the SPD which were attributed to the behavior of its leadership after the 2008 election. I neglect the 2009 election because of its exceptional nature. After 2009, no new state elections have been held in Hesse as of yet.

I thank an anonymous referee for pointing out this possibility.