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
44 Pages Posted: 27 Jan 2020
Date Written: January 3, 2020
It is puzzling that the single most important explanatory variable for municipal reserves is the state in which a municipality is located. In this paper we leverage a national panel of US municipalities to show that a pair of behavioral heuristics: anchoring and the bandwagon effect, are an excellent explanation for the state effect, and for municipal reserves. It appears that when it comes to deciding on how much to save, cities target the levels of savings they held in the past, adjusting 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: Suggested Citation