Understanding How State Fixed Effects Explain Municipal Reserve Balances
29 Pages Posted: 15 Jul 2020
Date Written: August 21, 2019
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 broad 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