Responsiveness of local governments to financial and institutional reforms: evidence from Italy

This thesis proposes three distinct contribution to the field of economic analysis on local government. In particular, each of the three studies focuses on a specific Italian policy reform allowing us to analyze how it affects local fiscal policy decisions. In the first chapter we investigate the impact on expenditure of tax on principal dwellings before 2008 and the impact on expenditure of the grant which, after 2008, compensated for the abolition of the tax on principal dwellings. We setup a theoretical model in which the introduction of a political bias against taxation gives rise to the flypaper effect. If the public good is very important with respect to private consumption then an increase in the municipal size implies a decrease in the extent of the flypaper effect; the opposite happens if the public good is not important with respect to private consumption. We then test the hypotheses coming from the model by using data on Italian municipalities, focusing on two groups of expenditure: the principal expenditure, which are those essential to guarantee the minimum standard daily life of a municipality and the rest, defined as residual expenditure. We find that the flypaper effect holds for both kinds of expenditure, but decreases with respect to population in the case of principal expenditure and increases with respect to population in the case of residual expenditure. In the second chapter we setup a model in which the residents of two neighboring municipalities can use the services provided by public infrastructures located in both jurisdictions. If services are either complements or substitutes in use, the municipalities strategically interact when investing in infrastructures; moreover, when they differ in population size, the small municipality reacts more to the expenditure of its neighbor than the big one. The theoretical predictions are then tested by estimating the determinants of the stock of public infrastructures of the municipalities belonging to the Autonomous Province of Trento, in Italy. By introducing a spatial lag-error component, we find that municipalities positively react to an increase in infrastructures by their neighbors, but the effect tends to vanish above a given population threshold. Finally, in chapter 3 we use data for all Italian municipalities from 2001 to 2007 to empirically test the extent to which two different electoral rules, which hold for small and large municipalities, affect fiscal policy decisions at local level. Municipalities with fewer than 15,000 inhabitants elect their mayors in accordance with a single-ballot plurality rule where only one list can support her/him, while the rest of the municipalities uses a runoff plurality rule where multiple lists can support her/him. Per capita total taxes, charges and current expenditure in large municipalities are lower than in small ones if the mayor of the large municipality does not need a broad coalition to be elected, otherwise the use of a single- or double-ballot rule does not make any difference in the policy outcome.