Who seeks reelection: local fiscal restraints and political selection

Abstract

This paper analyzes the consequences of local fiscal autonomy with respect to political selection. We propose a model of political careers wherein the decisions to become candidates and to seek reelection are both endogenous. Private-sector aptitude and political ability are private information; the latter is revealed to the incumbent during her first period in office. We show that, following an unanticipated reduction in the returns from holding office, incumbents with high market ability are more likely to refrain from running for office again than their lower-ability counterparts. We test that prediction using an unexpected reduction in the upper bound of the municipal property tax rate, announced by Portugal’s prime minister in July 2008, just 15 months before the local elections. We rely on a comprehensive data set for all Portuguese mainland municipalities for the 2005 and 2009 elections, including the characteristics of the municipalities and individual mayors. We employ a difference-in-differences strategy to show that affected mayors—those who were forced to reduce the property tax rate, and thus faced a sharp tax revenue decline—are less likely to seek reelection. This effect is driven by high-professional-status incumbents.

Appendices

Appendix 1: Model results

Recalling (1), the individual runs for political office if

$$\begin{aligned} r-m+(\alpha +\lambda m)(h-m)\ge 0 \end{aligned}$$

We now show that (1) is decreasing in m. Note that (1) is a concave quadratic function of m. Using the fact that $\lambda<1-\alpha <1$, the slope of (1) ranges between

$$\begin{aligned} -1+\lambda -\alpha (1+\lambda )<0,\,\text {when}\,m\rightarrow 0\\ \quad \text {and}-1-(\alpha +\lambda h)<0,\,\text {when}\,m=h \end{aligned}$$

Therefore, the function is strictly decreasing in the relevant range $m\in (0,h]$.

Finally, we show that $\hat{m}(h)$ is increasing in h. In order to check this, note that $\hat{m}(h)$ is a zero of (1), and the partial derivative of the expression is negative with respect to m, and positive with respect to h. A straightforward application of the implicit function theorem establishes the comparative statics result.

Appendix 2: Additional tables

See Tables 10, 11, 12, 13, 14, 15, 16, 17, 18, 19, 20, and 21.

Table 10 Balance tests (mean differences in 2006–2007)

Table 11 Reelection candidate mean differences for treatment and comparison groups

Table 12 Results: left-wing party mayors

Table 13 Results: right-wing party mayors

Table 14 Results: younger mayors (below median age)

Table 15 Results: older mayors (above median age)

Table 16 Robustness: high-tax municipalities, excluding metropolitan areas

Table 17 Robustness: high-tax municipalities, excluding coastal areas

Table 18 Robustness: high-tax municipalities, excluding NUTS 2 regions

Table 19 Robustness: high-tax municipalities, excluding entrepreneurs

Table 20 Term limit reform and possible selection into treatment

Table 21 Impact of property tax reform on income surtax rate