Do equalization payments affect subnational borrowing? Evidence from regression discontinuity

Köppl Turyna, Monika and Pitlik, Hans (2016): Do equalization payments affect subnational borrowing? Evidence from regression discontinuity.

Abstract

According to the fiscal federalism literature sub-central budget constraints become softer when local governments are more dependent on revenues over which they have no discretion. As a consequence of higher ’transfer-dependency’, sub-central governments can expect to be bailed out by the central government and therefore tend to accumulate higher levels of debt. We test this conjecture with data from Austrian municipalities. Austria is a fiscally highly centralized federation in which tax autonomy at the sub-central level is almost absent. Our identification strategy is based on a discontinuity caused by a special regulation on population weights in the tax sharing agreement between central government and the municipalities. We analyze the discontinuity in the conditional expectation of borrowing given population size to unveil an average causal effect of the treatment. Our results indicate that in line with theoretical expectations municipalities with higher revenue dependency observe higher net borrowing per capita. We also find that almost one half of the observed discontinuity works through an investment channel. Net borrowing is spatially correlated.

• Item Type: MPRA Paper
• Language: English
• Keywords: fiscal autonomy; subnational borrowing; vertical fiscal imbalance; regression discontinuity
• Subjects: D - Microeconomics > D7 - Analysis of Collective Decision-Making > D72 - Political Processes: Rent-Seeking, Lobbying, Elections, Legislatures, and Voting Behavior; D - Microeconomics > D7 - Analysis of Collective Decision-Making > D78 - Positive Analysis of Policy Formulation and Implementation; H - Public Economics > H7 - State and Local Government ; Intergovernmental Relations > H74 - State and Local Borrowing; H - Public Economics > H7 - State and Local Government ; Intergovernmental Relations > H77 - Intergovernmental Relations ; Federalism ; Secession

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