Electoral Systems and Fiscal Policy Outcomes: Evidence from Poland

Abstract

This article studies the causal effect of electoral systems on fiscal outcomes using an empirical design exploiting a discontinuity in the application of electoral rules in Polish municipalities in the period 2002-2014. In that period, municipalities followed either majoritarian or proportional (PR) systems, depending on the population size. The article provides evidence that the PR system results in smaller municipalities’ own revenue, larger intergovernmental transfers and, consequently, greater vertical fiscal imbalance. It is demonstrated that the reduction in own revenue under the PR system is arguably driven by lower accountability of policy-makers, which leads to lower effort of policy-makers in stimulating local labour markets and entrepreneurship. A heap in intergovernmental grants, in turn, can be explained by a larger share of incumbents affiliated with national political parties.