Government fragmentation and fiscal deficits: a regression discontinuity approach

Abstract

Some electoral systems favor strong single-party majority governments, while others the formation of coalitions. Having one or the other is likely to affect economic outcomes in ways that are unintended when the electoral rules are approved. In this paper, we show that government fragmentation has large fiscal implications. We also provide results that have a causal interpretation. Using a panel of Spanish municipalities, along with a close-elections regression discontinuity design, we find that single-party majorities run budgets with a 1.5% point larger primary surplus than that of coalitions. In addition, we show that lower deficits are driven mainly by single-party majority governments’ capacity to raise more revenues. These findings are robust to several model specifications.