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Revenue decentralization, central oversight and the political budget cycle: Evidence from Israel

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  • Baskaran, Thushyanthan
  • Blesse, Sebastian
  • Brender, Adi
  • Reingewertz, Yaniv

Abstract

This paper examines whether revenue decentralization and direct external financial supervision affect the incidence and strength of political budget cycles, using a panel of Israeli municipalities during the period 1999-2009. We find that high dependence on central government transfers - as reflected in a low share of locally raised revenues in the municipality's budget - exacerbates political budget cycles, while tight monitoring - exercised through central government appointment of external accountants to debt accumulating municipalities - eliminates them. These results suggest that political budget cycles can result from fiscal institutions that create soft budget constraints: that is, where incumbents and rational voters can expect that the costs of pre-election expansions will be partly covered later by the central government.

Suggested Citation

  • Baskaran, Thushyanthan & Blesse, Sebastian & Brender, Adi & Reingewertz, Yaniv, 2015. "Revenue decentralization, central oversight and the political budget cycle: Evidence from Israel," ZEW Discussion Papers 15-046, ZEW - Leibniz Centre for European Economic Research.
    • Handle: RePEc:zbw:zewdip:15046
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    More about this item

    Keywords

    political budget cycles; soft budget constraint; local governments; decentralization;
    All these keywords.

    JEL classification:

    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
    • H72 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Budget and Expenditures
    • H74 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Borrowing
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory

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