Empirical Essays in Political and Public Economics

Abstract: This thesis consists of four self-contained essays.Essay 1: Despite the key role played by political payoffs in theory, very little is known empirically about the types of payoffs that motivate politicians. The purpose of this paper is to bring light onto this. I estimate causal effects of being elected in a local election on monetary returns. The claim for causality, I argue, can be made thanks to a research design where the income of some candidate who just barely won a seat is compared to that of some other candidate who was close to winning a seat for the same party, but ultimately did not. This research design is made possible thanks to a comprehensive, detailed data set covering all Swedish politicians who have run for office in the period 1991—2006. I establish that monetary returns are absent both in the short and long run. In stead, politicians seem to be motivated by non-monetary payoffs that can be realized with a successful political career.Essay 2 (with Matz Dahlberg and Karin Edmark): In recent decades, the immigration of workers and refugees toEurope has increased substantially, and the composition of the population in many countries has consequently become much more heterogeneous in terms of ethnic background. If people exhibit in-group bias in the sense of being more altruistic to one's own kind, such increased heterogeneity will lead to reduced support for redistribution among natives. This paper exploits a nationwide program placing refugees in municipalities throughoutSweden during the period 1985—94 to isolate exogenous variation in immigrant shares. We match data on refugee placement to panel survey data on inhabitants of the receiving municipalities to estimate the causal effects of increased immigrant shares on preferences for redistribution. The results show that a larger immigrant population leads to less support for redistribution in the form of preferred social benefit levels. This reduction in support is especially pronounced for respondents with high income and wealth. We also establish that OLS estimators that do not properly deal with endogeneity problems – as in earlier studies – are likely to yield positively biased (i.e., less negative) effects of ethnic heterogeneity on preferences for redistribution.Essay 3: While the literature on how intergovernmental grants affect the budget of receiving jurisdictions is numerous, the very few studies that explicitly deal with likely endogeneity problems focus on grants targeted towards specific sectors or specific type of recipients. The results from these studies are mixed and make it clear that the knowledge about grants effects is to this date still insufficient. This paper contributes to this literature by estimating causal effects on local expenditures and income tax rates of general, non-targeted grants. This is done in a difference-in-difference model utilizing policy-induced increases in grants to a group of remotely populated municipalities inFinland. The robust finding is that increased grants have a negligible effect on local income tax rates, but that there is a substantial positive immediate response in local expenditures. Furthermore, there is no evidence of dynamic crowding-out – i.e., that the immediate response in expenditures is reversed in later years. The flypaper behavior displayed by the treatment group can potentially be explained by “separate mental accounting” – i.e., voters treating the government budget constraint separately from their own.Essay 4 (with Matz Dahlberg and Eva Mörk): Public employment plays an important role in most countries, as it is closely linked to both the quality of publicly provided welfare services and total employment. Large parts of those employed by the public sector are typically employed by lower-level governments, and one potential instrument with which central decision-makers can affect public employment is thus grants to lower-level governments. This paper investigates the effects of general grants on local public employment. Applying the regression kink design to the Swedish grant system, we are able to estimate causal effects of intergovernmental grants on personnel in different local government sectors. Our robust conclusion is that there was a substantial increase in personnel in the central administration after a marginal increase in grants, but that such an effect was lacking both for total personnel and personnel in child care, schools, elderly care, social welfare and technical services. We suggest several potential reasons for these results, such as heterogeneous treatment effects and bureaucratic influence in the local decision-making process.