This is a really cool paper by Kristof De Witte, Benny Geys, and Nanna Lauritz Schönhaged in Journal of Urban Economics. Mayoral salaries in Belgium are based on a population schedule, so you might expect politicians to favor policies that can bump up their pay grade.

Political economists have long maintained that politicians respond to both (re-)election and financial incentives. This article contributes to the latter literature by analysing whether, when and how local office-holders respond to the economic incentives embedded in exogenously imposed population thresholds leading to an increased number and remuneration of local politicians. Building on insights from the urban economics and public finance literatures, we argue that local politicians may strategically adjust fiscal and housing policies to stimulate in-migration when approaching a population threshold where their remuneration increases. Using data from all 589 Belgian municipalities over the period 1977–2016, our results confirm that approaching important population thresholds causes lower local tax rates and the granting of additional building permits (particularly for apartments). These policy changes occur early in the election cycle and, at least for housing policy, are restricted to incumbent mayors themselves expecting to benefit from crossing the population threshold.

The paper is written in an interesting way that I generally describe as the “detective novel.” The paper walks through a series of findings, asking interesting questions and answering them along the way. To some extent, the next question explored is conditional on the finding from the previous question. This is a different from a paper that asks a couple of different questions defined at the start because they can be independent from one another. I find these papers more compelling, but they are risky to write as an author because revisions have downstream effects on the paper, so the authors are to be commended for it.

Here is an outline of those questions and my summary of their findings:

1. “Is there evidence of population bunching around the threshold?” Not really, not to the eyeball or a few statistical tests, anyway. So perhaps they are not good at it because they don’t have a really sharp mechanism for manipulating the population figures.
2. “Is there evidence of attempted bunching from a plausible mechanism?” In building permits for apartments, local governments just below the threshold are more permissive than those above, albeit the confidence intervals are somewhat large. However, there aren’t comparable changes in placebo areas like renovation permits. On tax policy, local income and property tax rates suggest some bunching around thresholds, but they don’t seem to be particularly good at this approach in that the rates stick to either side of the threshold.
3. “Is the timing of the threshold determination date is important relative to the election cycle?” In other words, did the mechanisms demonstrate heterogeneity based on whether we are about to undergo another election? De Witte et al.’s results suggest the cycle does matter, as the results converge towards zero as the election date approaches. Perhaps mechanisms like building permits are too slow to be of any value within a few months, and are likely to disturb your current voters in the meantime, or you don’t want a big raise just as you are about to go up for reelection.
4. “Does it work to get you re-elected?” This is kind of important for guessing at the welfare inference. If getting across the population thresholds increases the probability of reelection, then this is less policy manipulation to get a raise and more doing what voters want. After all, a mayor who is doing well should attract new residents, and you could plausibly think voters would want to reward that. But it should not uniquely matter at the thresholds if that is the case. Indeed, mayors are no more frequently re-elected when they cross thresholds than not, so it seems unlikely that seeking rewards from the electorate is at least not a valid justification for mayors to attempt this (albeit, they may be doing so on the mistaken belief).

It is a neat paper. I would also recommend Ed Glaeser’s “The Curley Effect: The Economics of Shaping the Electorate” if you wanted to think about how to distinguish competing hypotheses over how political actors are motivated in altering the demographics of their populace.

Nathan Jensen (University of Texas-Austin) has an important new paper in Public Choice on “Bargaining and the Effectiveness of Economic Development Incentives: An Evaluation of the Texas Chapter 313 Program.” Here is the abstract:

Existing research has examined how the mobility of capital shapes bargains between firms and governments. The major barriers to examining bargaining behavior include the large number of dimensions to these bargains and differences in capacity and strategies firms and governments. In this paper, I examine data from a unique economic development incentive program in the state of Texas that holds almost all elements of bargaining constant, leaving only the ability of firms to walk away from a given location during the bargaining process. Using original data on the bargaining outcome as well as elite opinions, I document the extent to which firms that chose to locate in Texas made their decisions independent of this special economic development program. My findings suggest that only 15% of the firms participating in the program would have invested in another state without this incentive. The majority of these projects, and incentive dollars, were allocated to firms already committed to investing in Texas. Case studies of over 80 projects reveal that in many cases it was an open secret that companies had already committed to their investment locations prior to receiving the incentive. This implies that structure of the program encourages the overuse of incentives.

At the point estimates alluded to in the abstract, Jensen concludes that high end cost per job “created” estimates of $350,000/job are still too low.

Those that cover economic development incentives in their teaching might make use of some of the anecdotal cases covered in the paper. Many of the cases suggest that incentives were often approved even though the firms had already committed to their location. For example (p. 16):

The most surprisingly revelation is JD Wind’s application (Application #54) for a Chapter 313 agreement, 3 years after construction of a wind farm. In that application, JD Wind clearly points out that the original application for a wind project was submitted prior to construction by a previous project owner, but that that application never had been voted on by the school district. Thus, since only the fling of the application is technically required prior to construction, JD Wind applied for a 313 for those already built wind farms and for additional wind farms that would expand the project further. The project ultimately was approved by the school board and the Comptroller’s office for both the 3-year old facility as well as its expansion.

Check out Jensen’s Economic Development Incentive Evaluation Project and similarly themed blog from his website. His new book with Edmund Malesky, Incentives to Pander: How Politicians Use Corporate Welfare for Political Gain (Cambridge Press), is available at Amazon (video).

The ANNALS of the American Academy of Political and Social Science has several articles on evidence based policy. The table of contents is here, and several are relevant to the field of public budgeting, particularly those interested in performance based budgeting:

Introduction

Evidence-Based Policy: The Movement, the Goals, the Issues, the Promise by Ron Haskins

Background 

A Brief History of Evidence-Based Policy by Jon Baron

The Role of Evaluation in Building Evidence-Based Policy by Larry L. Orr

Major Elements of the Evidence-Based Movement

Evidence-Informed Policy from an International Perspective by Thomas Chupein and Rachel Glennerster

Use of Administrative Records in Evidence-Based Policymaking by Robert M. Groves and George J. Schoeffel

The Role of Behavioral Economics in Evidence-Based Policymaking by William J. Congdon and Maya Shankar

Managing toward Evidence: State-Level Evidence-Based Policymaking and the Results First Initiative by Patrick Lester

Pay for Success Is Quietly Undergoing a Radical Simplification by George M. Overholser

The Contributions of Institutions  

The Office of Management and Budget: The Quarterback of Evidence-Based Policy in the Federal Government by Kathy Stack

The Institute of Education Sciences: A Model for Federal Research Offices by Grover J. (Russ) Whitehurst

The Role of Federal Agencies in Creating and Administering Evidence-Based Policies by Rebecca A. Maynard

The Roles Foundations Are Playing in the Evidence-Based Policy Movement by Robert C. Granger

The Role of Nonprofits in Designing and Implementing Evidence-Based Programs by James X. Sullivan

Significance of the Evidence-Based Movement  

Can Evidence-Based Policy Ameliorate the Nation’s Social Problems? by Virginia Knox, Carolyn J. Hill, and Gordon Berlin

Evidence-Based Policy in the Real World: A Cautionary View by Adam Gamoran

A Policy-Maker’s View  

Generating and Using Evidence Will Help to Reduce Social Problems by Senator Todd Young

Following the Evidence to Reduce Unplanned Pregnancy and Improve the Lives of Children and Families by Senator Thomas R. Carper, Andrea Kane, and Isabel Sawhill

“Does Taxation Lead to Representation?” Michael L. Ross, British Journal of Political Science (2004).

“Tax Revolts in Historical Perspective.” Joseph D. Reid, Jr. National Tax Journal (1979).

The article by Ross (no relation) uses panel data on countries to test the hypothesis that the need to tax forces authoritarian governments to democratize, but finds that support for the hypothesis depends on what that question is supposed to mean. The article by Reid covers theories of political revolt, and discusses the politics of tax administration in colonial America.

Social Impact Bonds are a relatively new financing mechanism in public policy. They are interesting because they look like an X-prize or a professional athlete’s incentive laden contract, but with social policy targets. A government writes a contract with a private sector entity that specifies a set of goals with rewards earned if targets are met.

Government Executive has published a nice, digestible, overview of what the literature has learned, drawing particularly from “Use of Social Impact Bonds to Address Social Problems: Understanding Contractual Risks and Transaction Costs” by Sheela Pandey (Penn State-Harrisburg), Joseph Cordes (George Washington University), Sanjay Pandey (George Washington University), and William Winfrey (Centers for Medicare and Medicaid Intervention) that appears in a recent issue of Nonprofit Management & Leadership. From the abstract:

 

We conduct an in-depth case study of the Social Innovation Financing Youth Recidivism project (SIF) in Massachusetts. Our case study is comprised of a qualitative analysis of the multi-party contract and multi-year quantitative benefit-cost analysis to understand transaction costs. We draw upon contract theory to develop an analytical framework for the case analysis and highlight the risks and safeguards for the various parties to the contract, and conduct a formal benefit-cost analysis to map out transaction costs. We conclude with a discussion of study implications and future research.

The most obvious advantage of SIBs is the idea that the government only pays for some degree of success, instead of taking on a new costly venture that may or may not work out. However, what much of the article does is attempt to explain these contracts within Contract Theory. Writing a contract is about solving a variety of information problems like adverse selection, moral hazard, and principle-agent problems. What Pandey et al. discuss is that the merits of social impact bonds depend heavily on the types of contracts the public entity can write, either with vendors who would run the program or with their own in-house staff, given their institutional constraints. In principle, this is the same problem underpinning the make-or-buy decision of the for-profit sector, where contracts generate incentives, create information, and provide accountability. A department store like Target and a shopping mall are similar entities that have organized their production with very different contracts. Target executives don’t know exactly the right amount of floor space to devote to women’s shoes in Bloomington or what mix of brands to carry, but they have contracts that attempt to internalize this decision with local management and information systems; the shopping mall attempts to auction off the square footage to the highest bidder, letting the market answer those questions. The former system requires Target executives to have a lot of top level information over how to run a store so they can manage their local managers correctly, while the shopping mall executives forgo those costs entirely but take significant transaction costs by repeatedly accessing the market system to negotiate their floor space. (N.B. “Bosses Don’t Wear Bunny Slippers.”)

What Target and the shopping mall have going is a lot of common interest in making profit, which is observable and the litmus test for participation. In the public space, Pandey et al. make the case that the underlying problems of information, incentives, and transaction costs remain with a political twist. Without a profit motive aligning all the vested stakeholders, many of the information problems are not as easily defined through contracting, and all parties have some incentives for opportunism. The authors provide a framework for thinking through dealing with different types of contractual hazards associated with the stakeholders party to the contracts (p. 513, Table 1):

1. Standard opportunistic behavior: the private sector agency taking the contract might be a source of risks associated with moral hazard, adverse selection, and other types of incomplete information.
2. Governmental opportunism: Private sector actors are subjected to risks from governmental agents (which can be much broader than the specific agencies undertaking the contracts). Governments necessarily consist of competing factions of power (e.g., political parties, legislative vs. executive vs. judicial, etc.) that can benefit from contract failure at the expense of their governmental rivals.
3. Third-party opportunism: A public contract undertakes scrutiny from the public and/or perhaps agencies associated with transparency or contract monitoring. For example, some of these third parties have their own opportunities for profiting from the attention received for being perceived as whistle-blowers.

The case studies provide many examples within this framework, and the paper is very nuanced. The discussion in section 5 is a must read.

I love historical anecdotes that can be plugged into research papers.* They give contemporary, technical, papers a timeless feel. I came across one that would be great for several different paper topics in reading The Empire of the Steppes: A History of Central Asia by french historian René Grousset.

Grousset shares the account of Genghis Khan’s (1162 – 1227) discovery of taxation. The purpose of the story is actually to highlight Khan’s willingness to listen to advisers of diverse backgrounds, particularly those he gained from conquering more civilized societies. One of his advisers, Ye-lu Ch’u-ts’ai, “succeeded in giving his master some tinge of Chinese culture, and even sometimes in preventing massacre” (p. 251). While many of the accomplishments were rescuing precious texts from town burnings and searching out medical treatments, one of these was convincing Khan the merits of taxation over genocide (p. 251):

At the time of Jenghis Khan’s last campaign in Kansu, a Mongol general pointed out to him that his new Chinese subjects would be useless to him, since they were unsuited to warfare, and that therefore he would do better to exterminate them–there were nearly ten million–so that he might at least make use of the soil as grazing land for the cavalry. Jenghiz Khan appreciated the cogency of this advice, but Ye-lü Ch’u-ts’ai protested. “He explained to the Mongols, to whom any such idea was unknown, the advantage to be gained from fertile soil and hard-working subjects. He made clear that by imposing taxes on land and exacting tribute on merchandise, they might collect 500,000 ounces of silver yearly, 80,000 pieces of silk, and 400,000 sacks of grain.” He won his point, and Jenghiz Khan ordered Ye-lü Ch’u-ts’ai to draw up a system of taxation on these lines.

Here are some potential topics/literatures where this anecdote could work:

1. As an example of Militarist Theory in Fiscal Sociology. This is a bit on the nose to the point of being data, but the tradition of militarist theory posits that military competition and the development of taxation were a joint product. Probably most associated with Joseph Schumpeter, militarist theory attempts to explain the rise of modern bureaucracy. Taxes give rise to the state and provide it the resources to make war on other states. Those states which could most efficiently extract resources from their economy would be more likely to eliminate their competitors and avoid extinction in a kind of Darwinian competition of governance.**
2. As the nature of government in public choice. Public choice scholars love to define what “the state” actually is and specify its nature. Violence is definitely some part of that definition/nature. I’ve actually never liked the way people toss out the “taxes are the price of civilization” mantra, because it seems to me a more civilized society wouldn’t need taxes to accomplish public works. I think the Khan anecdote is a better interpretative context for thinking about how taxes bring us civilization.
3. Policy diffusion: Or more specifically, mimetic isomorphism for our friends in public administration.
4. Revenue Forecasting and/or Cost-Benefit Analysis. This may be a bit harsh, but one can’t help but wonder if Khan would have gone the other way and wiped out 10 million people if the revenue forecast had only been 40,000 pieces of silk.

*My favorite appears in footnote 1 of this NTJ article on American state tax amnesties: “The first tax amnesty on record was reported on the Rosetta stone, an amnesty declared by Ptolemy V Epiphanes in Egypt, circa 200 BC. The stone itself expressed the appreciation of the priesthood for the program. It is not clear whether any state amnesties were based on this experience.”

**The militarist theory bears a striking resemblance to the “burning the cosmic commons” hypothesis that, among other things, provides an explanation for the Fermi paradox.

Here are some recent working papers and publications that have otherwise gone unmentioned at PPF:

“Public Contracting for Private Innovation: Government Expertise, Decision Rights, and Performance Outcomes.” Joshua Bruce, John de Figueiredo, and Brian Silverman. NBER Working Paper.

“Beyond Spending Levels: Revenue Uncertainty and the Performance of Local Governments.” Stephane Lavertu and Travis St. Clair. Journal of Urban Economics.

“The Distance Between Buchanan’s ‘An Economic Theory of Clubs’ and Tiebout’s ‘A Pure Theory of Local Public Expenditures.’ New Insights Based on an Unpublished Manuscript.” Peter J. Boettke & Alain Marciano. The European Journal of the History of Economic Thought.

“Housing Subsidies and Property Prices: Evidence from England.” Nils Braakmann and Stephen McDonald. Regional Science and Urban Economics.

“The effect of revenue diversification and form of government on public spending.” Ji Hyung Park and Sungho Park. Journal of Public Budgeting, Accounting & Financial Management. 

“Public Pensions and Collective Bargaining Rights: Evidence from State and Local Governments.” Trang Hoang and Doug Goodman. Public Administration Review.

“Is Tax Increment Financing a Fiscal Bane or Boon?” Phuong Nguyen-Hoang. Journal of Planning Education & Research.

“Taxed Out: Illegal property tax assessments and the epidemic of tax foreclosures in Detroit” by Bernadette Atuahene and Christopher Berry.

“The Role of Royalties in Resource Extraction Contracts.” Robert F. Conrad, Bryce Hool and Denis Nekipelov. Land Economics.

Yesterday the US Supreme Court ruled public employees could not be compelled to pay union dues, which is widely interpreted as a major blow to public unions. I therefore thought it apropos to share a recent working paper from Eric Brunner, Joshua Hyman, and Andrew Ju on “School Finance Reforms, Teachers’ Unions, and the Allocation of School Resources.” In the 1970’s and 80’s, there were a wave of school finance reforms around movements to bring state spending on local schools up to adequacy standards or to make it more geographically equitable. These reforms have been studied in hundreds of papers with a mix of findings, but Brunner et al.’s clever twist is to see if the heterogeneity is explainable by the strength of teacher’s unions. From page 2:

Regardless of the teacher union power measure we use, we find that unions played a critical role in determining both the amount of state aid that translated into education expenditures and the allocation of these funds. Consistent with a basic model of teacher union preferences, school districts in states with the strongest teachers’ unions increased education expenditures nearly one-for-one with increases in state aid in response to school finance reforms, whereas states with the weakest teachers’ unions reduced local tax effort by about 75 cents on the dollar. The additional school spending in strong teacher union states was allocated primarily toward teacher salaries, while districts in weak teacher union states spent the money primarily on teacher hiring. Finally, spending in non-instructional areas such as classroom support, school administration, and capital outlays, also increased more in strong teacher union states than in states with weak teachers’ unions.

My favorite identification strategy in the paper is a border discontinuity approach, where the sample is restricted to school districts along state borders, where local population characteristics and unobservables are likely similar but state policy on collective bargaining powers can differ sharply.

Overall, the finding is rather agnostic on the social value of unions in the sense that you can either interpret this result as unions capturing public budgets as a well-organized interest group, or as unions ensuring that these reforms actually accomplished intended outcomes of generating more investment in school inputs. For work on that distinction, I would recommend starting with Jan Brueckner and David Neumark’s (2014) “Beaches, Sunshine, and Public Sector Pay: Theory and Evidence on Amenities and Rent Extraction by Government Workers” in American Economic Journal: Economic Policy.

There is great need for good research on the effect of transparency on the quality of government. While most people in the public arena seem to presume transparency as an obvious good in the governmental sector, the theoretical work on the impact contains more ambiguous predictions. For example, in a Belsey-style principle-agent model where “good” and “bad” types of politicians run for election and re-election, transparency has the effect of revealing bad types once they become incumbents and reduces their probability of re-election to zero. This reduces the rewards for bad types to run for office in the first place, but if they do manage to get into office they are incentivized to steal as much as possible because there are no prospects of a second term. This causes the effect of transparency to depend on key parameter assumptions about the distribution of types and various detection probabilities that present a selection vs screening trade-off.

Conditions are therefore pretty prime for some really excellent work on the impact of government transparency, and generally the literature is rather anecdotal. Courtesy SSRN working papers is “Financing Dies in Darkness? The Impact of Newspaper Closures on Public Finance” by Pengji Gao (University of Notre Dame) Chang Lee (University of Illinois-Chicago), and Dermot Murphy (University of Illinois-Chicago). Here is the abstract:

Local newspapers hold their governments accountable. We examine the effect of local newspaper closures on public finance for local governments. Following a newspaper closure, we find municipal borrowing costs increase by 5 to 11 basis points in the long run. Identification tests illustrate that these results are not being driven by deteriorating local economic conditions. The loss of monitoring that results from newspaper closures is associated with increased government inefficiencies, including higher likelihoods of costly advance refundings and negotiated issues, and higher government wages, employees, and tax revenues.

American local governments are a really good setting for this work, as the decline of subnational media competition is well documented. The obvious concern here is that one would reasonably expect that negative economic conditions are a big challenge to producing causal research, but Gao et al. have three really persuasive strands of evidence. First, they are able to demonstrate that the negative effects of newspaper closure is pretty consistent across geographies all along the economic growth spectrum. That is, the findings in high growth areas are similar to those in low or negative growth. Secondly, they use Craigslist’s introduction into the area as an instrument for newspaper closure. Craigslist was a significant disrupter of local media because of the competition for ad revenue, so it increased the likelihood of newspaper closure by about 10 percent while being plausibly exogenous to local investors’ expectations of local government quality. Third, they show that closures of newspapers where the pre-existing media market was thin had particularly pronounced effects.

Gao et al.’s study might be the best empirical evidence in favor of transparency’s positive influence on governmental quality. The best evidence against I’ve seen is in a fascinating Vietnamese field experiment published in American Political Science Review, where Malesky, Schuler, and Tran (2012) commissioned a series of online news columns that produced specific coverage of the activities of 144 randomly selected government delegates. While this coverage did reduce the reelection chances of the treated delegates, they also found this caused these delegates to curtail their visible activities downstream while otherwise not having much effect on other indicators of delegate performance. Obviously, a Vietnamese local electorate within an authoritarian central government is a very different institutional context from American democracy, but the contrast suggests we are in for a lot of interesting future work on optimal transparency conditions.

The seminar will be December 13-14th in Berlin and the theme is “Rethinking Market Discipline.” Authors for accepted papers receive travel and hospitality support from the ministry, and there is a cash prize for the best paper with the option to be published in International Tax & Pubic Finance. Here is the description:

The Fiscal Policy Seminar (FPS) will be held on an annual basis and aims to bridge the gap between academic research in public economics and policy-making.

The theme of the 2018 seminar is “Rethinking Market Discipline”with a specific eye on the challenges of institutional design, for example within the European Monetary Union. Our objective is to bring together leading academics and policy makers to showcase frontier academic work that enhances our understanding of the interaction of market discipline, fiscal sustainability and financial resilience, identifying new questions in research, policy making, and institutional design along the way.

We are especially interested in submissions covering topics that include, but are not necessarily limited to the following fields:

• Market discipline, insurance mechanisms and stabilization
• Fiscal challenges of exiting the Zero-Lower Bound with heterogeneous fiscal conditions
• Doom loops: The interaction of fiscal policy and financial markets
• Regulatory forbearance, consequences and reform options
• Insolvency procedures for jurisdictions, also on sub-national levels