Fiscal Response to Revenue Shocks

Simon Berset (University of Fribourg)
Martin Huber (University of Fribourg)
Mark Schelker (University of Fribourg)

Abstract : We study the impact of fiscal revenue shocks on local fiscal behavior. We focus on a very volatile revenue source (immovable property gains tax) in the canton of Zurich, Switzerland, and analyze fiscal behavior following large and rare positive and negative revenue shocks. We apply causal machine learning strategies and implement the post-double-selection LASSO estimator to identify the causal effect of revenue shocks on public finances. We show that local policymakers are, on average, fiscally conservative: they smooth positive shocks and mitigate negative ones by spending cuts. Fiscal behavior is partly driven by the organization of the municipal legislative organ and the electoral cycle. The fiscal responses in towns with local assemblies as well as in pre-election years are best described as fiscally conservative. In contrast, the responses in towns with local parliaments and in post-election years are sensitive to revenue fluctuations, i.e., they spend positive and mitigate negative shocks.

Economic Forces Shape Beliefs: a Model of Investment Under Fundamental Uncertainty

Johannes Binswanger (St. Gallen)
Anja Garbely (Lucerne)
Manuel Oechslin (Lucerne)

Abstract : Capitalist systems regularly produce innovations in the form of novel technologies and business models that put interested financial investors in a situation of fundamental uncertainty. Absent a factual basis for assigning probabilities to possible outcomes, investors often turn to subjective prior beliefs about an innovations' chances of success or failure. In this paper, we present a theoretical model of how investors adopt subjective priors under fundamental uncertainty. The model's core element is a "narrative contest", a competition in which profit-seeking financial intermediaries wish to influence investors' priors about the chance that a recent innovation will indeed deliver a high rate of return. Using this framework, we identify factors that make investors more likely to adopt "exuberant" priors, i.e., priors that lead them to ignore objective warning signs for too long. We also demonstrate how our model can guide a financial regulator that, realistically, does not have better information than the investors.

Political Organization and Public Investment: Evidence from Close Municipal Elections

Gabriel Natividad (Universidad de Piura)

Abstract : Using a national law and close municipal elections in Peru, I implement a nonparametric regression discontinuity framework estimating the impact of political organization on municipal investments upon the advent of regulation integrating municipalities into a national public investment system. Nationwide party mayors elected in close contests increase municipal investment by 60% compared with local party mayors; they also seek more external contracting investment deals with more diverse outside partners and obtain more beneficial social outcomes for their communities. Evidence on organizational structure and capabilities as channels for the influence of nationwide party victories is discussed.

Legal Status and Local Spending: the Distributional Consequences of the 1986 Irca

Navid Sabet (Goethe University Frankfurt)
Christoph Winter (LMU Munich)

Abstract : We examine the impact of immigrant legalization on the distribution of state and local spending by exploiting variation in legal status arising from the 1986 Immigration Reform and Control Act (IRCA), which legalized three million Hispanic migrants. We find that governors, irrespective of party, allocate more per capita to IRCA-affected counties. This allocation is sensitive to the governor’s electoral incentives and leads to Hispanic educational improvements, suggesting that it is politically motivated and targeted. Overall, our work underscores the importance of public expenditure as a channel linking legal status to a range of socio-economic benefits documented by the literature.