Do What We Did Last Year but Don’t Stray Too Far from the Pack, the Role of Behavioral Heuristics in Explaining Municipal Reserve Balances

34 Pages Posted: 27 Jan 2020 Last revised: 22 Jun 2020

See all articles by Kawika Pierson

Kawika Pierson

Willamette University - Atkinson Graduate School of Management; affiliation not provided to SSRN

Jon Thompson

Willamette University - Public Policy Research Center

Fred Thompson

Willamette University - Atkinson Graduate School of Management

Date Written: June 20, 2020

Abstract


In this paper we leverage a national panel of US municipalities to show that a pair of heuristics identified from the behavioral economics literature, anchoring and the bandwagon effect, help to explain the number of years of expenses municipalities hold in reserve. We build our empirical case using two innovative techniques, a two-stage regression specifically designed to test for anchoring, and a measure of the spatial autocorrelation of reserves. The results strongly suggest that, when it comes to deciding on how much to save, cities target the levels of savings they held in the past, adjusted for the savings levels of their neighbors.

Keywords: Municipal revenue and expenditures, Municipal savings, Unrestricted fund balances, Behavioral public finance, Anchoring, Bandwagon Effect

JEL Classification: H71, R51, G41

Suggested Citation

Pierson, Kawika and Thompson, Thompson and Thompson, Fred, Do What We Did Last Year but Don’t Stray Too Far from the Pack, the Role of Behavioral Heuristics in Explaining Municipal Reserve Balances (June 20, 2020). Available at SSRN: https://ssrn.com/abstract=3513268 or http://dx.doi.org/10.2139/ssrn.3513268

Kawika Pierson

Willamette University - Atkinson Graduate School of Management ( email )

900 State Street
Salem, OR 97301
United States

affiliation not provided to SSRN

Thompson Thompson

Willamette University - Public Policy Research Center ( email )

900 State Street
Salem, OR 97301
United States

Fred Thompson (Contact Author)

Willamette University - Atkinson Graduate School of Management ( email )

900 State Street
Salem, OR 97301
United States
503-370-6228 (Phone)
503-370-3011 (Fax)

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