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

Abstract

Fiscal rules, or constraints on the policymaking discretion of elected officials, are widely used to regulate fiscal policies. Using data on Italian municipalities, we employ a difference-in-discontinuity design to show a negative effect of fiscal rules on mayoral candidates’ education. The effect is driven by municipalities where fiscal rules meaningfully restrict the action space of politicians. These results are consistent with a formal model of fiscal rules and political selection and highlight a new "general equilibrium" effect of the former. Namely, reducing discretion may alleviate pork-barrel spending, but may also lower the quality of politicians.

Keywords: fiscal rules, selection of politicians, deficit, difference-in-discontinuity

JEL Classification: D72, H62, H70, H72