Fiscal Rules and the selection of politicians : theory and evidence from Italy

Fiscal rules, i.e., constraints to the policymaking discretion of elected officials, are widely used tools to regulate fiscal policies. We build a simple model that combines fiscal rules with endogenous entry into politics, showing how fiscal rules can negatively affect the quality (in terms of education) of candidates running for office. The mechanism behind this effect is due to the differential ability in choosing the correct policy between high and low education politicians and the fact that fiscal rules constraint politicians' actions, creating a relatively higher entry cost for high education politicians. Consistent with the model, the empirical analysis developed with data from Italian municipalities and a difference-in-discontinuity design shows that fiscal rules negatively affect candidates' education. We also show that municipalities where fiscal rules meaningfully restrict the action space of politicians (i.e., those not ex-ante financially constrained) drive the effect. In addition, we provide evidence that high education politicians are more likely to choose the correct policy when fiscal rules do not apply. These results highlight a new general equilibrium effect of fiscal rules. Reducing policymaking discretion may alleviate inter-jurisdictional externalities and pork-barrel spending. However, it may also lower the quality of the political class.