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.
This is a preview of subscription content, log in via an institution to check access.
Similar content being viewed by others
Notes
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.
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.
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.
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).
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.
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.
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.
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.
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.
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.
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.
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.
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.
The complete results from all robustness checks, including tables and additional information, can be provided upon request.
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).
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.
References
Akhmedov, A., & Zhuravskaya, E. (2004). Opportunistic political cycles: Test in a young democracy setting. The Quarterly Journal of Economics, 119(4), 1301–1338.
Alesina, A., & Paradisi, M. (2017). Political budget cycles: Evidence from Italian cities. Economics & Politics, 29(2), 157–177.
Bardhan, P., & Mookherjee, D. (2005). Decentralizing antipoverty program delivery in developing countries. Journal of Public Economics, 89(4), 675–704.
Bee, C. A., & Moulton, S. R. (2015). Political budget cycles in US municipalities. Economics of Governance, 16(4), 379–403.
Bonfatti, A., & Forni, L. (2019). Fiscal rules to tame the political budget cycle: Evidence from Italian municipalities. European Journal of Political Economy, 60, 101800.
Bordignon, M., Grembi, V., & Piazza, S. (2017). Who do you blame in local finance? An analysis of municipal financing in Italy. European Journal of Political Economy, 49, 146–163.
Borusyak, K. & Jaravel, X. (2017). Consistency and inference in Bartik research designs. Technical report, Working paper 2017.
Bracco, E. (2018). A fine collection: The political budget cycle of traffic enforcement. Economics Letters, 164, 117–120.
Bracco, E., Porcelli, F., & Redoano, M. (2019). Political competition, tax salience and accountability. Theory and evidence from Italy. European Journal of Political Economy, 58, 138–163.
Buchanan, J. M., & Wagner, R. E. (1977). Democracy in deficit: The political legacy of Lord Keynes. New York City: Academic Press.
Cabral, M., & Hoxby, C. (2012). The hated property tax: Salience, tax rates, and tax revolts. National Bureau of Economic Research: Technical report.
Callaway, B., & Sant’Anna, P. H. (2021). Difference-in-differences with multiple time periods. Journal of Econometrics, 225(2), 200–230.
Carozzi, F., & Repetto, L. (2016). Sending the pork home: Birth town bias in transfers to Italian municipalities. Journal of Public Economics, 134, 42–52.
Chetty, R., Looney, A., & Kroft, K. (2009). Salience and taxation: Theory and evidence. American Economic Review, 99(4), 1145–1177.
Cohen, S. (2012). Cash versus accrual accounting measures in Greek municipalities: Proxies or not for decision-making? International Journal of Accounting, Auditing and Performance Evaluation, 8(3), 203–222.
de Chaisemartin, C. and D’Haultfoeuille, X. & Guyonvarch, Y. (2019). DID_MULTIPLEGT: Stata module to estimate sharp difference-in-difference designs with multiple groups and periods. Statistical Software Components S458643. Boston College Department of Economics.
de Chaisemartin, C., & D’Haultfoeuille, X. (2022). Difference-in-differences estimators of intertemporal treatment effects. National Bureau of Economic Research: Technical report.
Drazen, A., & Eslava, M. (2010). Electoral manipulation via voter-friendly spending: Theory and evidence. Journal of Development Economics, 92(1), 39–52.
Dubois, E. (2016). Political business cycles 40 years after Nordhaus. Public Choice, 166(1), 235–259.
Giommoni, T. (2019). Does progressivity always lead to progress? The impact of local redistribution on tax manipulation. CESifo Working Paper Series 7588.
Goodman-Bacon, A. (2021). Difference-in-differences with variation in treatment timing. Journal of Econometrics, 225(2), 254–277.
Guillamón, M. D., Bastida, F., & Benito, B. (2013). The electoral budget cycle on municipal police expenditure. European Journal of Law and Economics, 36(3), 447–469.
Guiso, L., Sapienza, P., & Zingales, L. (2004). The role of social capital in financial development. American Economic Review, 94(3), 526–556.
De Jaeger, S. (2013). The political cost of residual municipal solid waste taxation: Perception versus reality. In A. D’Amato, M. Mazzanti, & A. Montini (Eds.), Waste management in spatial environments (p. 152). London: Routledge.
Jimenez, E., & Sawada, Y. (1999). Do community-managed schools work? An evaluation of El Salvador’s EDUCO program. The World Bank Economic Review, 13(3), 415–441.
McCaffery, E. J., & Baron, J. (2004). The political psychology of redistribution. UCLA L. Rev., 52, 1745.
Mookherjee, D. (2001). Combating the crisis in government accountability: A review of recent international experience. Department of Economics and Instituto for Economic Development.
Nannicini, T., Stella, A., Tabellini, G., & Troiano, U. (2013). Social capital and political accountability. American Economic Journal: Economic Policy, 5(2), 222–250.
Nordhaus, W. D. (1975). The political business cycle. The Review of Economic Studies, 42(2), 169–190.
Persson, T., & Tabellini, G. (2002). Political economics: Explaining economic policy. Cambridge: MIT press.
Putnam, R. (1993). The prosperous community: Social capital and public life. The American Prospect, 13(4), 35–42.
Raffer, C. (2020). Accrual accounting and the local government budget-A matching evaluation. Beiträge zur Jahrestagung des Vereins für Socialpolitik 2020: Gender Economics, ZBW - Leibniz Information Centre for Economics, Kiel, Hamburg.
Repetto, L. (2018). Political budget cycles with informed voters: Evidence from Italy. The Economic Journal, 128(616), 3320–3353.
Rogoff, K., & Sibert, A. (1988). Elections and macroeconomic policy cycles. The Review of Economic Studies, 55(1), 1–16.
Sakurai, S. N., & Menezes-Filho, N. (2011). Opportunistic and partisan election cycles in Brazil: New evidence at the municipal level. Public Choice, 148(1), 233–247.
Shi, M., & Svensson, J. (2006). Political budget cycles: Do they differ across countries and why? Journal of Public Economics, 90(8–9), 1367–1389.
Strate, J., Wolman, H., & Melchior, A. (1993). Are there election-driven tax-and-expenditure cycles for urban governments? Urban Affairs Quarterly, 28(3), 462–479.
Sun, L., & Abraham, S. (2021). Estimating dynamic treatment effects in event studies with heterogeneous treatment effects. Journal of Econometrics, 225(2), 175–199.
Tyran, J.-R., & Sausgruber, R. (2006). A little fairness may induce a lot of redistribution in democracy. European Economic Review, 50(2), 469–485.
Veiga, L. G., & Veiga, F. J. (2007). Political business cycles at the municipal level. Public Choice, 131(1–2), 45–64.
Author information
Authors and Affiliations
Corresponding author
Additional information
Publisher's Note
Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations.
We are grateful for the helpful comments provided by three anonymous reviewers and participants in the sessions of the 63rd Annual Conference of the Italian Economic Association in Turin, the 34th Annual Conference of the Italian Association of Public Economics in L’Aquila, and the 18th Annual Conference of the Italian Society of Law and Economics in Palermo. The authors contributed equally to each section of the paper. The usual disclaimer applies. No funds, grants, or other support were received. The authors have no competing interests to declare that are relevant to the content of this article. The dataset used in the current study is available from the corresponding author on reasonable request.
Rights and permissions
Springer Nature or its licensor (e.g. a society or other partner) holds exclusive rights to this article under a publishing agreement with the author(s) or other rightsholder(s); author self-archiving of the accepted manuscript version of this article is solely governed by the terms of such publishing agreement and applicable law.
About this article
Cite this article
Bracco, E., De Benedetto, M.A. & Lisciandra, M. Manipulating municipal budgets: unveiling opportunistic behavior of Italian mayors. Public Choice 198, 317–342 (2024). https://doi.org/10.1007/s11127-023-01131-3
Received:
Accepted:
Published:
Issue Date:
DOI: https://doi.org/10.1007/s11127-023-01131-3
Keywords
- Local political budget cycle
- Real estate tax
- Waste disposal tariffs
- Clientelism
- Fiscal manipulation
- Electoral incentives