The Local Political Economy of Austerity: Lessons from Hospital Closures in Romania

I study whether austerity measures implemented by a central government incentivize electorally-motivated policy adjustments at the local level. To do so, I first quantify the effects of a controversial 2011 health-sector reform carried out in Romania, whereby a significant proportion of the country’s public hospitals was discontinued. Exploiting geographic constituency-level variation in austerity exposure created by this measure, I document a significant increase in local "voter-friendly" government spending targeted towards infrastructure investments in the policy’s catchment areas. Consistent with an electoral mechanism explaining this response, the evidence suggests that the effect is driven by the actions of local politicians affiliated with those responsible for the reform. To rule out alternative explanations, I take advantage of a second natural experiment wherein a party previously in opposition to those responsible for the closure of hospitals allied itself with the measure’s principal orchestrator. Following this re-alignment, I find heterogeneous increases in local voter-friendly spending which further corroborate the electoral mechanism. Overall, my results indicate that the electorally-driven responses of sub-national governments may partially mitigate the political costs of carrying out austerity.