Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/108756
Authors: 
Rösel, Felix
Year of Publication: 
2014
Series/Report no.: 
Ifo Working Paper 189
Abstract: 
In many federal countries, local governments run large deficits, even when supervision by state authorities is tight. I investigate whether party alignment of mayors and supervisors influences local government borrowing. The dataset includes 427 local German governments over the period 1999–2012. I exploit variation of a far-reaching institutional reform that entirely re-distributed political powers on both debt issuance and supervision. The results show that short-term deficits of local governments are not enabled by a vertical “buddy” relationship between a mayor and a supervisor affiliated with the same party (co-partisanship) but rather by an ideological “bully behavior” of partisan supervisors and supervisees: left-wing local governments issue more debt, while left-wing supervisory authorities tolerate more debt. These findings imply that political independence for state supervisory authorities is highly recommended.
Subjects: 
Local government
public deficits
supervision
partisan cycle
JEL: 
H62
H74
H77
Document Type: 
Working Paper

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