Who seeks reelection local fiscal restraints and political selection

• Published in: Public choice Vol. 184; no. 1/2; pp. 105 - 134
• Main Authors: Peralta, Susana, dos Santos, João Pereira
• Format: Journal Article
• Language: English
• Published: New York Springer Science + Business Media 01-07-2020; Springer US; Springer Nature B.V
• Subjects: Ability; Aptitudes; Autonomy; Candidates; Careers; Economics; Economics and Finance; Endogenous; Local elections; Local government; Mayors; Political campaigns; Political Science; Politics; Predictions; Property taxes; Public Finance; Tax rates; Tax revenues; Taxation; H72; H71; C23; Political selection; Local governments; Fiscal autonomy; D71
• ISSN: 0048-5829; 1573-7101
• DOI: 10.1007/s11127-019-00702-7

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.