Fiscal Rules and the Selection of Politicians: Evidence from Italian Municipalities
Abstract: Despite the wide adoption, there is little evidence on the consequences of fiscal rules for the quality of government. I use data from Italian municipalities to study how fiscal rules affect the selection of politicians. In 1999, the Italian government applied fiscal rules to all municipalities. In 2001, it removed them for municipalities with less than 5000 inhabitants. Using a Difference-in-Discontinuity design, which enables control for an institutionally mandated increase in the wage paid to politicians at the 5000 threshold, I show that fiscal rules negatively affect the level of education of politicians. The result highlights a trade-off to fiscal rules. Reducing policymaking discretion may alleviate inter-jurisdictional externalities, but it may also lower the quality of the political class.
