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
Date Written: June 20, 2020
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: Suggested Citation