New Issue of Public Finance Review (May 2019)

The new issue announces the Outstanding Paper Award of 2018, which goes to Johsua M. Congdon-Hohman for “Retirement Reversals and Health Insurance: The Potential Impact of the Affordable Care Act.

Here are the new articles:

State Rainy Day Funds and Government General Fund Expenditures: Revisiting the Stabilization Effect
Wenchi Wei and Dwight V. Denison

Local Governments and Economic Freedom: A Test of the Leviathan Hypothesis
Adam A. Millsap, Bradley K. Hobbs, and Dean Stansel

Growth Effects of VAT Evasion and Enforcement
Chandler McClellan

Vertical Grants and Local Public Efficiency: The Inference-disturbing Effect of Fiscal Equalization
Ivo Bischoff, Peter Bönisch, Peter Haug, and Annette Illy

Population Shifts and Discrete Public Services: Rationing Rules and the Support for Public Goods
Todd L. Cherry, Stephen J. Cotten, and Michael McKee

Spatial and Dynamic Features of Land Value Capture: A Case Study from Bogotá, Colombia
Néstor Garza

A Replication of “Is Public Expenditure Productive?” (Journal of Monetary Economics, 1989)
Christopher Clarke and Raymond G. Batina

Call for Papers: VIII Ibero-American Conference on Local Financing (Mexico City)

The conference is October 1-2, 2019, hosted by the Universidad Iberoamericana and the Center for Economic Reserach and Teaching (CIDE).

The Conference continues a joint initiative of academics and policy specialists in local finance that began in Spain in 2011 and subsequently continued in Argentina (2013), Brazil (2014), Chile (2015) , Spain (2016), Argentina (2017), and Colombia (2018).

The objective of the conference is to present a maximum of twelve research papers on topics related to: 1.Fiscal decentralization; 2. Efficiency and quality of sub-national welfare expenditures including public investments; 3. Subnational  tax collection; 4. Management of Sub-national Governments; 5. Debt and subnational financing; and 6. Subnational financing frameworks for climate change within Ibero-American countries (Latin America and Spain).

In previous conferences, a total of 92 papers have been presented, showing a great thematic and geographical coverage, adding to the growing importance of local finances in Latin America and the Caribbean, both in the research agendas and in policy matters. The ultimate goal is to create evidence based policy to improve fiscal systems in the region.

The call for papers seeks research and unpublished studies that, within the general themes listed above, to disclose new findings and research advances on local financing issues in Ibero-American countries. Through an academic selection committee, research papers selected will be invited to present their work in Mexico City October 1 and 2, 2019. This includes travel support and lodging for one professional to participate in the conference.

While the sessions seek to exchange views and policy innovations,  professionals of think tanks, national budget authorities such as national ministries of finance, international organizations, local public officials, and finally academics and students of public policy and public administration, economics public and public finances will likely participate in the audience.  Additionally, a half day will be devoted to a “Workshop on the Challenges of Local Financing” and ideas will be exchanged on the definition of research topics to be addressed in the next JIFL.

Fill out this form to participate.

I appreciate professor Heidi Jane Smith (Universidad Iberoamericana) for both the notice of the conference and the translation above. Do note that the conference itself will be in Spanish.

*Higher Pay, Worse Outcomes? The Impact of Mayoral Wages on Local Government Quality in Peru*

That is the title of an article by Ricardo Pique (Ryerson University) in the Journal of Public Economics. Does raising salary for mayors result in better mayoral performance, or gentrify the pool of candidates in some way? Here is Pique on the evidence from Peru:

In this paper, I study how wages earned by local politicians affect local government quality. To identify the effects, I use caps imposed by the Peruvian central government on mayoral wages as an excluded instrument. The results show that mayoral wages do not improve government performance. In particular, there is a negative impact on public investment implementation and on performance goals set by the central government. Moreover, there is no evidence of a positive effect on politician selection, municipal bureaucratic capacity, and political effort. Wages do strongly affect the local political landscape, increasing political competition and reducing political support for the mayor. These changes may help explain the drop in performance as local authorities may face more political obstacles when implementing their policy agenda. Overall, the results show that higher politician wages need not improve local government quality.

To circumvent endogeneity, the instrument for actual wages paid is the maximum amount the Peruvian central government sets for mayoral wages (through a population based step function). So the identification is going to arrive from populations narrowly passing (or not) the threshold that allows them to offer higher mayoral wages.

Of course, evaluating public sector performance is an inherently difficult thing to do. There is a large cocktail of dependent variables, and they consistently show that they are negatively affected by getting the inducement into a higher wage. One of the author’s preferred outcome measures is a budget execution rate. According to Pique, Peruvian mayors are significant administrators of investment projects backed by the federal government, so he uses the share of the investment budget that was actually spent (“execution rate”). This was not very intuitive to me, so I’m just going to pull the explanation from footnote 38 on page 9:

Unlike other policy outcomes such as total revenue, investment implementation is within the mayor’s control. Local authorities are constantly pressured by both the central government and the local population to carry out their budgeted investment projects. Both national and local newspapers produce articles comparing the relative performance of local authorities in matters of public investment implementation. Failure to implement budgeted public investment projects can be particularly dangerous amid a weak institutional and political context. Ponce and McClintock (2014) show that low levels of implementation are correlated with more social protests.

Here is a sampling of some of the main results, and of course the study has many robustness checks with a particular interest on whether this gets at performance:


So, broadly, the effect on performance is negative. The question is why, and one possibility is that it undesirably changes the selection of mayors, so a variety of mayor and candidate for mayor attributes are effected by the wage offer. This does not appear to be the case:


A number of other plausible outcomes are investigated, including bureaucratic capacity, political effort, and political competition, and it seems like political competition (increased number of parties, reduction in winner’s vote share, reduction in public sector experience) is the most plausible explanation in terms of why a change occurs, though it is not terribly clear why this reduces performance rather than increasing it. Pique says the pattern is perhaps most supportive of creating a rising obstructionist party at the local level and this might be a Peru specific outcome. The negative effects on getting mayors with public sector experience shows up in a variety of ways, and I’m somewhat inclined to think of that as an important finding towards explaining what is happening. In my opinion, public service motivation is underrated by the public (albeit overrated by public administration scholars)

There is much of interest and to admire in the paper. For background reading, perhaps consider Besley and Case’s (1995) QJE paper “Does Electoral Accountability Affect Economic Policy Choices?“.

Can Centralized Performance Budgeting Systems Be Useful For Line Ministries? Evidence From Chile

A forthcoming article in Public Budgeting & Finance by Juan Pablo Martinez Guzman (UMD) discusses performance information use in line ministries in Chile. The question whether line ministries use performance information is important because in centralized top-down governance systems they may be perceived as externally imposed and, therefore, resented. The author offers several insights from this detailed case-study based on process-tracing methodologies.

The main findings for variables that either facilitated or hindered the use of centralized performance information systems are presented in table 2.

Overall, it appears that any resentment from line ministries can be overcome by involving third party technical experts, selecting homogenous performance measures, spending sufficient effort for (quality) program structuring, and investing in human capital.

These findings are directly relevant to many other central and regional governance systems around the world that operate in top-down performance regimes. A caveat is, however, each of Chile’s four key performance indicators appear to have emerged from separate waves of performance management reforms in the country. So, the road to performance information use in line ministries in centralized governance systems can run for decades. Martinez Guzman (page 9) writes that:

“performance indicators were the first component of Chile’s performance budgeting system, initially introduced in only five institutions through a pilot plan in 1993. The use of performance indicators expanded quickly to most of Chile’s government agencies, reaching 80 percent of them by the year 1997. From 1998 to 2000, performance indicators were used to determine if institutions would be awarded economic bonuses through the PMG. Because of their linkage to the PMG, performance indicators were excluded from budgetary appendices during the years 1999 and 2000. In 2001, performance indicators were removed from the PMG and restored as budgetary appendices. Finally, in the year 2011, performance indicators were reintroduced as the basis to determine PMG’s variable remunerations, and were also kept as part of the budgetary appendices that are presented to the legislature.”

*Political Parties Do Matter in U.S. Cities … For Their Underfunded Pensions*

That’s a new NBER working paper by Christian Dippel (UCLA), which finds that cities with Democratic mayors are more likely to underfund pensions:

Using data covering a wide range of municipal public-sector pension plans from 1962– 2014, I establish that unfunded pension benefits grow faster under Democratic-party mayors, using a regression discontinuity design (RDD) focusing on narrow mayoral races. Previous evidence shows that parties do not matter for a range of fiscal outcomes in U.S. cities, and suggests this is because Tiebout sorting imposes fiscal discipline. This paper shows that parties do matter for types of fiscal spending where benefits accrue to narrow constituencies and where costs are difficult to observe and understand for tax payers.

Generally the literature shows political parties does not much matter for local government finances, but as the authors here note those studies are typically exploring more visible fiscal outcomes. Here is the discontinuity for the main result (N=1,195):


The paper shows the finding to be robust to a number of subsamples, including plan type (police and fire-fighters), city system (mayor or council managers), and whether the mayor was a challenger or incumbent. The results are most pronounced for plan type, and as the figure shows, the effect is driven by being particularly close to the cut-off. These results imply that it is the result of pork barrel projects to win close elections. With any discontinuity there is concern that the threshold result will be different from the average treatment effect, so we should be a bit hesitant to think that states dominated with one party rule (i.e. no close elections) will have party differences in pension funding.