Essays in local public finance and political economy

Köhler, Felix

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URN:	urn:nbn:de:bsz:180-madoc-708494
Dokumenttyp:	Dissertation
Erscheinungsjahr:	2025
Ort der Veröffentlichung:	Mannheim
Hochschule:	Universität Mannheim
Gutachter:	Janeba, Eckhard
Datum der mündl. Prüfung:	2025
Sprache der Veröffentlichung:	Englisch
Einrichtung:	Fakultät für Rechtswissenschaft und Volkswirtschaftslehre > Finanzwissenschaft u. Wirtschaftspolitik (Janeba 2004-)
Lizenz:	Creative Commons Namensnennung 4.0 International (CC BY 4.0)
Fachgebiet:	330 Wirtschaft
Freie Schlagwörter (Englisch):	fiscal policy , political institutions , natural experiments , fiscal shocks , local public finance , subnational governments
Abstract:	Rich countries devote a substantial share of their resources to government spending. In the OECD, general government expenditure averaged around 43% of GDP in 2023, up from 39% in 2007 (OECD, 2023). This emphasizes the importance of understanding how policymakers at various levels of government make decisions. Unlike firms, which typically aim to maximize profits, the objectives of government spending are more complex and often multidimensional, for example encompassing equity, efficiency and political stability. These goals can differ across institutions and shift over time in response to political trends. A clearer understanding of the incentives, constraints and processes behind government action in specific contexts can contribute to more efficient and effective public resource allocation. This thesis advances our understanding of how political institutions respond to reforms and fiscal shocks, with a focus on German states and municipalities. These sub-national governments are particularly well-suited for empirical and causal analysis not only because they account for nearly 46% of general government spending in 2023 (Federal Statistical Office, 2025). They also provide a large number of observations and natural experiments that allow for causal interpretation. Germany provides an ideal setting for this research given its federal structure, degree of decentralization and the availability of high-quality administrative data. Specifically, Chapter 1 examines the consequences of abolishing minimum tenure requirements for parliamentary pensions. Despite the financial stakes involved and the ubiquity of reforms, they have received little empirical attention in the German context. Chapter 2 analyzes the effects of quasi-exogenous increases in municipal debt on local public finances, providing new evidence on how debt affects fiscal decision making and the role of fiscal oversight in mitigating unsustainable public finances. Chapter 3 investigates the fiscal impact of a breakthrough innovation by focusing on a vaccine producer whose success triggered an unprecedented surge in local business tax revenues. Leveraging the magnitude of this shock, the chapter contributes to the literature on windfall tax revenues and their implications for budget planning and intergovernmental transfers. Beyond their focus on economic decisions of elected officials within a political framework, the chapters in this thesis are unified by a shared empirical approach. All baseline results rely on event study designs, either in the form of the traditional two-way fixed effects estimator or a synthetic control group. This reflects not only a methodological preference but also the broader appeal of event studies as a transparent and intuitive way to present dynamic treatment effects. Event study plots were frequently requested in seminars, emphasizing their value in communicating results. The popularity of event studies is also reflected in recent theoretical developments, particularly debates around biases in the standard fixed effects estimator under staggered treatment timing, which is a common feature of event study designs (Roth et al., 2023) and one that is addressed in this thesis. The following chapters build on these topics and methods to explore how institutions respond to distinct fiscal and political challenges or opportunities. In Chapter 1, I investigate how pension reform, i.e., the abolition of minimum tenure requirements for parliamentary pensions, affects the composition of German legislatures. While previous research has extensively analyzed the effects of changes to politicians’ wages, there is limited empirical evidence on how pension system reforms influence political careers. This gap is particularly relevant in light of far-reaching pension reforms implemented in Germany over the past three decades. Using newly collected and harmonized administrative data on parliamentary careers at both the state and federal levels, this chapter analyzes the effects of pension eligibility rule changes across 17 legislative bodies. The empirical strategy exploits variation in the timing of reforms across states and differences in legislators' exposure to reforms within parliaments. Despite the sizable financial incentives involved in passing the tenure requirement, its elimination has limited compositional effects. There is no significant change in the probability of running for re-election, nor in the overall number of candidates, suggesting that the reform did not affect political entry or exit decisions in a systematic way. Additionally, no lasting shifts are observed in key characteristics such as age or gender. The only persistent compositional change is a decline in the share of legislators with PhDs, suggesting a modest shift toward a more socially representative legislature, although at the cost of academic quality. The chapter uncovers an important party-level response. Political parties rank candidates who are no longer subject to the tenure requirement after reform worse on party lists. This strategic repositioning emphasizes the central role of parties in parliamentary systems. There is no evidence of a persistent vote penalty associated with attempts to reach the tenure threshold prior to reforms, implying that candidates were not penalized electorally for this strategic positioning. Overall, these results call into question the reforms' effectiveness in achieving some of their goals like attracting a more diverse candidate pool. In Chapter 2, I explore the causal effects of professional football club relegation on local public finances in Germany. Exploiting this natural experiment, it examines how relegation-induced public budget shocks from football, which is caused above all by public stadium financing, translate into municipal debt and budget responses. This analysis contributes novel causal evidence on how debt affects local governments, an area that has so far received limited causal attention. The chapter is based on data of 178 municipalities that host a club in the Bundesliga system over more than two decades. The main finding is that relegation of a professional football team leads to a substantial and persistent increase in public debt for the host municipality, which on average amounts to €238 per capita or around 10% five years after relegation. This rise in debt occurs without significant changes to public investment or overall spending, suggesting that the additional debt does not crowd out core municipal services. However, municipalities consolidate budgets modestly, mainly by small and persistent increases in local business tax rates by about 0.18 percentage points and some asset sales. Interestingly, municipalities that host clubs experiencing promotion do not enjoy financial benefits, pointing to an asymmetric fiscal impact of athletic performance. The majority of the eventual observed debt reduction is driven by state-level debt reduction programs, which are effectively bailouts. These programs distribute the financial burden across taxpayers beyond the affected municipalities, potentially encouraging moral hazard. Nonetheless, the evidence suggests that debt accumulation is largely unaffected by the presence or absence of these programs, implying limited moral hazard. The analysis also reveals political economy dynamics. While relegation has little electoral impact, promotion yields modest electoral gains for incumbent parties associated with stadium upgrades, offering policymakers an incentive for risky financial commitments. In Chapter 3, which is joint work with Eckhard Janeba, Davud Rostam-Afschar and Paul Steger, I investigate how German municipalities respond to large, unexpected revenue shocks by exploiting another natural experiment. Following pharmaceutical company Biontech’s breakthrough in developing a COVID-19 vaccine in late 2020, corporate tax revenues increased substantially, especially in municipalities that hosted Biontech facilities. Using a synthetic control group approach, the chapter provides causal evidence on how municipalities adjust tax policy, expenditure and asset management in response to unanticipated and vast positive budget shocks. The chapter finds that treated municipalities received extraordinary tax windfalls of up to €3,440 per capita annually over four years, which is more than the annual budget before the shock, yet responded conservatively in terms of spending. Rather than increasing discretionary spending or public investment, they primarily used the revenue to repay debt, accumulate capital reserves and fulfill increased mandatory payments to the fiscal equalization system. Notably, municipalities misjudged the shock's persistence and as a consequence cut local business and property tax rates. As revenues returned to pre-shock levels faster than expected, tax cuts had to be reversed within four years, which illustrates how institutional constraints and expectations shape local fiscal policy. The chapter also uncovers a disconnect between tax cuts and real economic effects. Despite aggressive tax rate cuts and the stated goal to boost biotechnology clusters, there was no sustained increase in local firm activity within Biontech’s industry or overall. Moreover, business tax spillover effects on neighboring municipalities were minimal. One main contribution of Chapter 3 is studying a large shock to public finances, which occurs more often than perhaps expected. The shock's size allows for precise analysis of responses to non-marginal shocks in contrast to marginal shocks, which are usually the focus of studies in the literature. I document that in the literature the budgetary effect of smaller shocks is difficult to pin down as they tend to elicit more varied budgetary responses, while large shocks like the Biontech shock lead to more cautious fiscal policy. Together with the other chapters, these findings help to build a more nuanced understanding of the responsiveness of public finances to institutional and fiscal changes.