Fiscal Rules and The Selection of Politicians: Theory and Evidence From Italy

Abstract

Fiscal rules, or constraints on the policymaking discretion of elected officials, are widely used to regulate fiscal policies. Using data on Italian municipalities, we employ a difference-in-discontinuity design to provide evidence of the negative effect of fiscal rules on mayoral candidates’ education. Municipalities in which fiscal rules meaningfully restrict the action space of politicians drive the effect. These results are consistent with a formal model of fiscal rules and political selection. We highlight that reducing discretion may affect the composition of the pool of players: it may alleviate pork-barrel spending but also negatively affect the education of politicians.

Keywords: Fiscal rules, selection of politicians, deficit, difference-in-discontinuity

JEL Classification: D72, H62, H70, H72