The Role of Own-Source Tax Revenue in Disciplining Local Government Spending

Abstract

This study examines the role of own-source tax revenue in disciplining local government spending. We ask whether the Italian Imposta Municipale Unica (IMU) tax reform of 2012, which replaced national transfers with local property taxes, affected local government cost management. We find that municipalities more affected by the reform paid significantly less for public works after the reform without incurring greater delays in contract execution or cost overruns. We also find evidence that the cost savings resulted from local officials achieving greater price discounts and awarding more contracts to non-local vendors. Consistent with increased accountability explaining the improvements in cost savings, our results are stronger for municipalities with incumbent mayors facing re-election. 

Keywords: , public procurement, intergovernmental transfers, own-source tax revenue