Political Turnover and the Performance of Local Public Enterprises

We study how political party turnover at the municipal level affects the economic performance of Italian Local Public Enterprises. To this end, we match data on municipal elections in Italy to the budget data of firms whose shares are owned by Italian municipalities. As political turnover and performance are likely to be jointly endogenous, we exploit the quasi-experimental nature of close electoral races to estimate the causal treatment effect. We find evidence that municipal party turnover disrupts investment and slows down productivity growth. At the same time, the probability of observing financial distress is larger. No significant effect can be established, on the other hand, in terms of profitability and employment growth. We link the effect of municipal party turnover to three mechanisms: first, the nature of close electoral races alters the incumbent party’s incentives to invest; second, turnover makes the appointment of new, less-experienced, board directors more likely; third, the new political leadership directly reduces the amount of resources transferred in order to signal its commitment to curb wasteful municipal expenditure. We finally set up a survival analysis, whose results show that municipal party turnover is associated to an increase in the likelihood to observe bankruptcy.