Political conflicts over public policy in local governments

Abstract: This thesis consists of four self-contained essays on different conflicts shaping local government policy. The first essay examines how population aging affects the generosity of public long-term care. Aging may directly affect long-term care policy as the elderly become a more important voter group. However, concerns for other citizens may dampen the political importance of the elderly. Fixed effects regressions on municipality-level panel data for 1999-2007 suggest that long-term care generosity slightly decreases in response to an aging population. In particular, a smaller share of elderly become entitled to long-term care. The remaining three essays consider determinants of local fiscal performance. The second essay examines a case in which the Swedish central government granted financial assistance to 36 municipalities in financial trouble. The possibility to be bailed out by the central government is often argued to undermine local governments' incentives for fiscal discipline. However, the conditions attached to the grant under study may have reduced the attractiveness of the bailout option. We estimate fixed effects models of operating costs and net revenues during the decade following the announcement of the grant. The estimation sample consists of the municipalities affected by the program and suitable comparison units identified by the synthetic control method. The estimates suggest that the development of operating costs is largely unaffected by the program for most of the admitted municipalities. However, several have increased costs less than expected, and the development of net revenues is favorable for the group as a whole. Thus, we find little evidence that participation in this conditional bailout program undermined subsequent fiscal performance. The third essay examines how fiscal performance is affected by specific institutions aimed at encouraging the budget discipline of agents responsible for policy implementation. We emphasize that these institutions should be of greater importance in municipalities where there is a substantial conflict of interest between the two levels of the municipal hierarchy concerning the importance of fiscal discipline. Regressions on unique survey data from 265 of the 290 Swedish municipalities confirm that the correlation between institutions and fiscal performance depend on the reported strength of conflict between the two levels. A centralized budget process, a credible threat of replacement of managers running deficits, and surplus carry-over rules are all positively correlated to net revenues - but only in municipalities that report substantial conflicts of interest between the two hierarchical levels. However, a deficit carry-over rule is positively correlated to net revenues in municipalities reporting minor conflicts of interest. The fourth essay explores potential determinants of the conflicts of interest reported in the survey. The main findings are that (i) conflicts between the two hierarchical levels are less likely if members of the executive committee chair the local committees; (ii) conflicts are less common in municipalities with fewer committees; and (iii) conflicts are more likely in municipalities with recent experience of deteriorations of the general economic conditions. The first two findings suggest that the center of the municipal hierarchy may use its discretion over appointments and over the number of committees to resolve these conflicts of interests in some instances. However, as the general economic environment is beyond political control, it is difficult to fully prevent conflicts between the central and local level.