is centralization a solution to the soft budget constraint problem
TRANSCRIPT
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Is Centralization a Solution to the Soft Budget Constraint Problem?
Avi Ben-Bassat1Hebrew University and IDI
Momi Dahan2
Hebrew University and IDI
Esteban F. Klor3
Hebrew University, IDI and CEPR
June 2011
1Department of Economics, The Hebrew University of Jerusalem, Mount Scopus, Jerusalem
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Is Centralization a Solution to the Soft Budget Constraint Problem?
Abstract: to be added.
Keywords: Soft Budget Constraints, Centralization, Local Government, Bailout Program,
Summoned Committee.
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1.Introduction
Whereas the last decades of the 20th
century brought about a large wave of fiscal
decentralization in countries around the world, we observe in the last few years a move in the
opposite direction. Currently, central governments tend to intervene and constraint the behavior
of local governments in developed and developing countries as well as countries in transition.
The book edited by Rodden et al. (2003), for example, shows that the central government
increasingly expanded its oversight of local governments in a large number of federations,
ranging from developed economies as the U.S. (Inman, 2003) and Canada (Bird and Tazzonyi,
2003), developing countries like Argentina (Webb, 2003) and India (McCarten, 2003), and
economies in transition like Hungary (Wetzel and Papp, 2003).
The original drive for decentralization posited that lower level governments tend to make
more efficient decisions over local public revenues and expenditures for a number of reasons.
First, due to inter-jurisdictional competition, local politicians have a strong incentive to provide
better services to attract more residents (Tiebout, 1956). In addition, local politicians are more
attune with the preferences of the local population and better informed of their needs and
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behavior, whereby they shift part of the financial burden associated with local provision of
services to higher levels. That is, when the central government tends to bailout localities in
financial distress, localities that repeatedly deviate from a balanced budget constraints are able to
extract transfers from others, more financially responsible localities. Hence, a common-pool
practice behind the financing of local expenditures creates strong incentives for local officials to
overspend. This phenomenon is known in the literature as the soft-budget constraint problem
following the seminal work of Kornai (1979).1
The central government has a direct way of dealing with soft-budget constraint problems.
This includes developing an institutional setting that imposes the right incentives on local
governments, and includes a credible no-bailout policy. In most countries of the world, however,
central governments are unable to commit to a no-bailout policy for political reasons. In these
cases, central governments resort to hierarchical oversight and regulation to reign on localities
soft-budget constraints. These types of interventions, also called administrative subordination,
often consist on centrally appointing local politicians rather than electing them.
This paper studies whether administrative subordination is an effective tool to solve soft-
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the central government. In particular, they consist of (i) the appointment of an accountant that
has to approve every expenditure and reports directly to the central government; (ii) the
imposition of a recovery program specifically tailored for each locality that specifies, among
other things, tax collections targets and number of employees that need to be fired; and (iii) the
dismantling of the mayor and members of the local council that are replaced by a summoned
board as the only authority of the locality. Since their inception, these programs were instituted
in more than half of Israels localities in order to curtail their deficits and expenditures.
Despite the widespread use of hierarchical oversight and administrative subordination in
Israel and elsewhere, it is not clear that these policies are effective in imposing hard budget
constraints on local governments. The case studies mentioned above report mixed results of
hierarchical oversight. These studies, however, do not present any systematic empirical evidence
on the effects of centralization on the fiscal performance of local governments. In this paper, we
focus on the widespread use of hierarchical oversight and administrative subordination in Israel
since 2004 to analyze their effects on localities fiscal performance and their provision of public
goods.
Our results suggest that the administrative subordination of local politicians has had only
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characteristics, we observe that central intervention is only effective in Arab localities by
lowering their expenses and slightly increasing their tax collection.
We decompose the effects of intervention between the three different types of
administrative subordination enacted by the central government. The analysis shows that
whereas the appointment of an accountant that reports directly to the central government has a
significant effect on localities expenditures and tax collection, the effects of a recovery program
are nil. Hence, our analysis concludes that central intervention has a limited effect on localities
fiscal performance, and that limited intervention is desirable over more centralization of local
governments.
2. Institutional and Fiscal Background
Over the last two decades, the fiscal performance of Israels localities has been
characterized by repeated crises, which resulted in severe service interruptions both at the local
and national level. Usually, the central government intervened and solved the conflict by bailing-
out localities in financial difficulties. For example, the central government covered the localities
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faced and tended to reward at the polls mayors that increased local expenditures and deficits
before the elections (Rosenberg, 1992).2
After the repeated bailouts and transfers during the 1990s, the central government reached
the conclusion that one of the main causes for the constant fiscal failure of localities was the
central governments behavior and the pernicious incentives that behavior created. In part to
solve the problem created by the soft budget constraints, and in part because of the economic
impact of the global economic crisis and the Second Palestinian uprising, the central government
substantially lowered its transfers to localities between 2001 and 2003. As a consequence, a large
number of localities suffered a severe economic crisis, whereby their debts and deficits ballooned
and the quality of services they provided deteriorated (Ben-Bassat and Dahan, 2009).
Unwilling to increase its transfers to localities and bail them out, the Israeli central
government decided in 2003 to implement several new measures regarding its dealings with local
governments. The main objective of these measures was to restore the budget discipline of local
governments. These measures consisted on different types of central intervention on local
governments to ensure that localities do not deviate from pre-determined fiscal objectives. Since
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(iii) the dismantling of the mayor and members of the local council while imposing a summoned
board as the main authority of the locality.3
The level of intrusiveness of the central government, and the corresponding damage on
local democratic institutions, gradually increases as we move from an intervention of type (i) to
an intervention of type (iii). The first type of intervention, the appointment of an accountant that
reports directly to the Interior Ministry, is meant to provide the central government with direct
control over a localitys expenditures. The appointed accountant has to approve in advance every
expense of the locality, including the hiring of new employees. In some localities, the appointed
accountant (or a different functionary under the accountants responsibility) is also in charge of
collecting local tax revenues.
The second type of intervention consists of the formulation of a recovery program for the
locality under intervention. While in the past localities that received general grants from the
central government to cover their deficits were said to be in a recovery program, there were no
clear guidelines or objectives to be fulfilled under this program. This situation drastically
changed with the new program that the government approved in 2003 and started in 2004. In
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locality, the Interior Ministry rewards localities that meet the recovery programs targets with
transfers that equal half of their short-term debt (50% as a grant and the remainder 50% as a
loan). Hence, the main change that occurred in 2004 is that the governments grants to localities
were now conditioned on the locality achieving pre-determined fiscal goals.
The final type of intervention is the imposition of a summoned board. This is the most
severe measure of administrative subordination taken to deal with the fiscal crisis of some
localities. While using it, the central government basically replaces by decree the localities
elected officials (the mayor and the members of the local council) by a summoned committee.
Once in place, all roles and responsibilities are transferred from the elected mayor to the
appointed committee. The committee then governs the locality up until the next local election,
which is usually three years after the appointment of the committee. In some cases, under the
discretion of the central government, a committee may be appointed to two terms of three years
each.
Arguably, the most important change introduced by the new plan of 2003 (and
implemented in 2004) was the introduction of clear rules determining the criteria used to
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Accordingly, the Interior Ministry may appoint an accountant to localities with a current
deficit out of total revenue above 10 percent and a short-term debt above 15 percent of total
revenue. In addition, for the central government to be able to appoint an accountant it has to be
the case that the localities underperform with respect to their local tax collections. The exact
thresholds for underperforming regarding tax collections vary according the localities socio-
economic index.4
The fiscal situation of a locality has to be even worst for the Interior Ministry to be able to
impose on the locality a specially tailored recovery program. In particular, a program is
constructed for localities whose short-term debt is above 17.5 percent of its total revenue.
Recovery programs were also restricted to localities that were entitled to (unconditional)
equalization grants and with more than 4,000 residents.5
In addition to a recovery program, the
Interior Ministry may appoint an accountant to some localities if it considers that these localities
are not going to properly execute the requirements outlined in their recovery program. Indeed,
4Every locality in Israel is ranked by its socio-economic status according to a scale from 1 (the lowest
status) to 10 (the highest status). The rank is based on the localities residents standard of living (income
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during the period at issue many localities are under both types of intervention: they have an
accountant appointed by the Interior Ministry and are under a recovery program.
A locality has to be even under a worst fiscal situation for a summoned board to be
imposed. Accordingly, summoned boards are imposed on localities whose current deficit is over
15 percent of their total revenue, whose short-term debt is over 30 percent of their total revenue,
and whose tax collection rates are below the thresholds specified in Table 1. In addition, the
ministry of interior must dismiss a localitys elected bodies and impose a summoned board when
its council has not approved the localitys budget within three months after the beginning of the
fiscal year.
3. Data
For the purposes of our analysis we use data on central intervention and on economic and
demographic characteristics of localities in Israel between 2000 and 2008. The data on central
interventions come directly from the Interior Ministry. While the data on economic and
demographic characteristics of the localities come from the Israeli Central Bureau of Statistics
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until 2008.6
The table shows that the move from a regime with a lot of discretion to one with
clear and objective rules resulted in a substantial increase on interventions, especially on Arab
localities. For example, we see that in 2004, the first year of the new program, 60 out of 73
localities with an Arab majority were under intervention. Moreover, the Interior Ministry
appointed in 2004 an accountant in 23 out of 59 Arab localities under the recovery program. This
shows the commitment of the central government to implementing the reform intended to
generate a hard budget constraint on the localities, mostly at the cost of the administrative
subordination of the localities fiscal powers to the central government. It also highlights the lack
of confidence the central government had on the localities ability (or willingness) to reach the
goals of the recovery program by themselves, without a centrally appointed accountant
monitoring the localities expenditures.
The picture is somewhat similar in localities with a Jewish majority. As in Arab localities,
we see a widespread use of recovery programs, with over 40% of Jewish localities under this type
of intervention. Unlike Arab localities, however, the central government appointed an accountant
in addition to a recovery program only in five localities, thus showing more faith on the ability of
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used. That is, almost all Arab localities intervened in 2004 continue to be intervened between
2005 and 2008, with 41 out of 73 Arab localities under intervention since 2004. We observe
more decay in the number of Jewish localities under intervention over time, with only 19
localities under intervention every year since the beginning of the new centralization program.
Importantly, however, the severity of the type of intervention increases over time, with a
substantial increase on the use of summoned boards since 2007, especially in Arab localities.
The number of summoned boards appointed in 2007-2008 is unprecedented, to the point that it is
larger than the number of appointed summoned boards in the previous five decades combined.
B. Localities Fiscal and Demographic Data
We study the effect of intervention on all available variables measuring the fiscal situation
of localities, their expenditures and their ability to collect revenues. These include different
measures of the localities debt, deficit and expenditures on services, as well as their efficiency in
terms of collecting local property taxes and water bills.7 By looking at all these measures we are
able to analyze the effectiveness of the intervention program in terms of the changes it causes on
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Table 3 presents summary statistics for the main variables of interest. The table tabulates
the localities according to ethnicity, and to whether or not a locality is ever under intervention
between 2004 and 2008. The table shows separate summary statistics for the different four
groups of localities for the period before the beginning of the intervention program (2000 to
2003) and the period after the beginning of the intervention program (2004 to 2008). As a first
pass, the table plainly shows some of the differences between Jewish localities and Arab
localities. While we focus on the period before the implementation of the intervention program,
we observe that Arab localities revenue is significantly lower than that of Jewish localities, and
therefore their debt as a share of their revenue is substantially higher even if the average deficit
per capita is similar across Arab and Jewish localities. As a consequence, expenditures tend to be
lower in Arab localities compared to those of Jewish localities, even though Arab localities
receive more transfers from the central government. Finally, the data show that Arab localities
are less populated, have a lower socio-economic status and a lower percent of students that
complete their matriculation compared to Jewish localities.
Let us now focus on the comparison of localities within their ethnic group before the
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environment, as shown by their lower share of the largest party in the local council, in
comparison to the rest of the localities.8
We now switch our attention to the years 2004 to 2008, the period after the
implementation of the intervention program. The table shows that Jewish and Arab localities
under intervention still have higher debts and deficit than localities not under intervention. We
also observe, however, a substantial change in localities expenditures. Accordingly, localities
under intervention now have significantly lower expenditures compared to the rest of the
localities. In addition, Arab localities under intervention collect higher rates of local taxes
compared to the rest of the Arab localities.
To obtain a better measure of the effects of intervention on Jewish and Arab localities we
need to look at the difference-in-differences of the average variables of interest. That is, we need
to calculate the differences for each outcome of interest between the averages before and after the
program of the differences between localities under intervention and the rest of the localities.
Such a calculation confirms our previous discussion. That is, we observe that (i) the deficit of
Jewish localities under intervention relative to the rest of the localities decreased by NIS 65 per
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there is a substantial increase in transfers from the central government of NIS 66.5 per capita in
Arab localities.9
There are several caveats regarding the preliminary conclusions based on Table 3. First of
all, they only show unconditional changes on the outcomes of interest. We develop below a
multivariate regression approach to address this issue. Secondly, Table 3 makes evident that
treated and untreated localities are substantially different in terms of their observables before the
treatment. Therefore, it seems safe to assume that there are significant differences between
treated and untreated localities also in terms of their unobservable characteristics. This creates an
inference problem since central intervention is definitely correlated with the localities
characteristics.
To concentrate on a more homogenous group of localities, we restrict our sample to those
localities whose short-term debt as a share of their total revenue was in 2003 between 10% and
25%. That is, given that localities with short-term debt as a share of total revenue above 17.5%
are included in the recovery program, our range concentrates on localities within 7.5 percentage
points of this threshold, and compares those slightly below the threshold (which were not treated)
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Table 4 replicates the analysis of Table 3 but focusing exclusively on this subsample of
localities. Table 4 leads us to slightly different conclusions than those reached based on Table 3.
While we still observe that debt and deficit of intervened localities increase (relative to the rest of
the localities) and their expenditures decrease (but only for Jewish localities), the magnitude of
the effect is substantially lower than that obtained in Table 3. It is plausible, therefore, that the
effects observed for the entire sample are spurious. Another possibility is that the threat of
intervention affects the behavior of localities not intervened but slightly above the intervention
threshold. Finally, it may be that comparing the before and after means of the variables of
interest masks important gradual but slow changes caused by the program. Figures 1 and 2
address the last possibility.
These figures depict, for every outcome of interest, the difference in means between those
localities intervened in 2004 2008 and the remainder localities. Figure 1 focuses on the
localities debt, deficit and expenditures. The figure clearly depicts the gradual worsening fiscal
situation of the treated localities during the years 2000-2003, before the beginning of the
program. The figure also shows the gradual but slow relative improvement of the fiscal situation
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untreated localities. Our empirical framework below is especially designed to pay particular
attention to the gradual effect of the intervention program on the outcomes of interest.
4. Empirical Framework
Our empirical specification allows us to examine how central intervention affects the
performance of localities. The following linear regression model presents our preferred
specification to estimate relationship between central intervention and the localities
performance:
(1)
where Yit is the outcome variable of interest, a list of which appears in Tables 3 and 4;
(Intervention)i,t-1 is a dummy variable that equals one if locality i is under central intervention in
year t-1; (Intervention)i,t-1 * (Jewish Locality)i is a dummy variable that equals one for Jewish
localities under intervention in year t-1. Thus, our analysis allows for a different effect of the
Yi,t =1(Intervention)i,t1+2(Intervention)i,t1(Jewish Locality)i +
1(Years Intervention)i,t1 +2(Years Intervention)i,t1(Jewish Locality)i +Xi,t1+t+c +uit,
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locality fixed effect; and thes, s and the vector are unknown parameters that need to be
estimated. Unobserved determinants of the localities performances are captured by the error
term, uijt.11
The goal of the proposed econometric specification on equation (1) is to identify the joint
impacts of the s and s. In particular, we are interested on the immediate effect of
intervention as well as on the protracted effect of intervention over time. Based on equation (1),
the immediate effect of intervention is equal to (1 + 1) for Arab localities, and to (1 + 2 + 1
+ 2) for Jewish localities. The gradual effect of intervention over time equals 1 for Arab
localities and (1 + 2) for Jewish localities.
5. Results
Table 5 presents the results of the estimations of equation (1), which show the effect of
central intervention on the localities main outcomes of interest. Before discussing the results,
we need to keep in mind that they are based on the entire sample of localities, and that the
estimation does not differentiate between different types of administrative subordination
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capita, with an additional decrease of over NIS 100 per any additional year of intervention.
Intervention has also a significant effect on total expenditures and total salary payments, both for
Jewish and Arab localities. According to the estimates, central intervention causes a decrease of
over NIS 150 in a localitys total expenditure and of over NIS 100 in a localitys total salary
payments per capita. Moreover, every additional year under intervention brings about a decrease
of expenditures of slightly over NIS 100 per capita for an Arab locality and of NIS 84 per capita
for Jewish localities. In Arab localities, a third of the yearly expenditures decrease are due to a
decrease in total salary payments, whereas for Jewish localities the yearly decrease on salary
payments accounts for almost half of their decrease on total expenditures.12
In addition, we
observe that localities improve their collection of local property taxes. This is especially
pronounced in Arab localities. According to the estimates, an Arab locality increases its
collection of property taxes by 7.4 percent due to intervention, and every additional year of
intervention translates into an additional 2.8 percent increase in property taxes collected.13
Finally, we also observe that treated localities receive significantly more transfers from the
central government, which especially increase among Arab localities. Arab localities under
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Summarizing, the results suggest that the administrative subordination of localities is
associated with a decrease in their expenditures, an increase in local tax collection, and an
increase in transfers from the central government. All of the above bring about a decrease of the
localities deficit. The apparent improvement on fiscal outcomes, however, does not immediately
translate on better public good provision. The percentage of students that finish their
matriculation is not affected by intervention, nor is the intervened localities net migration (see
Appendix Table 1).
While giving us a first view at the effects of central intervention, the estimates presented
in Table 5 may be spurious for the reasons already mentioned above. The sub-sections below
address these identification concerns.
5.1 Accounting for Localities Different Unobservable Characteristics
An important concern related to the estimation of the effect of central intervention on
localities performances is that treated and untreated localities are substantially different in terms
of their unobservable characteristics. The evidence presented in Table 3, which shows that
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leading us to believe that they are also similar in terms of their unobservable characteristics that
vary over time.
The message that emerges from Table 6 is very different from the one obtained from
Table 5. Accordingly, once we compare the effects of intervention across similar localities, the
analysis suggests that the effects of administrative subordination are more limited than those
observed in Table 5. In particular, the results confirm only effects of intervention on Arab
localities. We observe that administrative subordination causes a reduction of total expenditures
and salary payments, and an increase on central transfers in Arab localities only. The decrease of
total expenditures due to intervention equals NIS 146 per capita, and almost all of it (NIS 124 per
capita) is caused by decreases in total salary payments. The increase of central transfers due to
intervention equals NIS 183 per capita. These effects are of similar magnitudes to those found in
Table 5. In addition, we observe that continued central intervention causes a significant increase
in Arab localities collection of property taxes and water bills (Appendix Table 2).
The results of Table 6 clearly establish that the actual central intervention of a locality
does not have a statistical significant effect on Jewish localities and has a limited effect on Arab
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seem to significantly affect a localitys fiscal performance, it is possible that adopting a program
that includes a stick (in addition to a carrot) has a significant effect on localities that are not under
intervention. Unfortunately, the available data and institutional details of the intervention
program do not allow us to empirically test the validity of the possibility that the threat of
intervention affects a localitys performance.
5.2 Differentiating by Type of Intervention
The previous sub-section showed that central intervention has a significant effect on the
fiscal behavior of Arab localities. The analysis in the previous section, however, does not
distinguish between the three different forms of administrative subordination implemented by the
central government. This is the focus of the current subsection.
As already discussed in section 2, the Israeli government implemented three different
types of central intervention: (i) the appointment of an accountant that approves every
expenditure and reports directly to the central government; (ii) the imposition of a recovery
program specifically tailored for each locality; and (iii) the dismantling of the mayor and
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interventions in equation (1).14
Every cell of Table 7 reports the total immediate effect of each
type of intervention or the total effect of each additional year of each type of intervention
separately for Jewish and Arab localities. Numbers in parentheses are thep-values from anF-test
on the significance of each type of intervention (or years of intervention).
The results in the table corroborate the conclusions obtained in Table 6; that is, central
intervention affects mostly total expenditures and total salary payments of Arab localities. Table
7 also shows that most of the effect is caused by the appointment of an accountant, which is the
mildest of the three types of interventions. Interestingly, the imposition of a recovery program
does not seem to have a significant effect on any of the outcomes of interest either for Jewish or
Arab localities.
Summarizing, this table shows that different types of administrative subordination have
different efficacy on localities fiscal performances. The imposition of a recovery program,
which includes a carrot and a stick and is supposed to incentivize local politicians into sound
fiscal policies, does not have a strong effect on localities performances. On the contrary, a less
intrusive program that consist of the appointment of an accountant that reports directly to the
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6. Conclusions
To be added.
7. References
Ben-Bassat, Avi and Momi Dahan (2011). Social identity and voting behavior, Public Choice,
forthcoming.
Ben-Bassat, Avi and Momi Dahan (2009). The crises of localities in Israel: Efficiency versus
representation, in Ben-Bassat, A., and M. Dahan (eds.), The Political Economics of the
Municipalities in Israel, Jerusalem: The Israel Democracy Institute (in Hebrew), 15-91.
Bertrand, Marianne, Esther Duflo, and Sendhil Mullainathan (2004). How much should we trust
differences-in-differences estimates? Quarterly Journal of Economics, 119(1): 249-275.
Bird, Richard M. and Almos Tassonyi (2003). Constraining subnational fiscal behavior in
Canada: Different approaches, similar results? in Rodden, J., Eskeland, G.S., and Litvack,
J. (eds.), Fiscal Decentralization and the Challenge of Hard Budget Constraints,
Cambridge, Massachusetts: The MIT Press, 85-132.
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Inman, Robert P. (2003). Transfers and bailouts: Enforcing local fiscal discipline with lessons
from the U.S. federalism, in Rodden, J., Eskeland, G.S., and Litvack, J. (eds.), Fiscal
Decentralization and the Challenge of Hard Budget Constraints, Cambridge,
Massachussetts: The MIT Press, 35-83.
Kornai, Janos (1979). Resource-constrained versus demand-constrained systems,
Econometrica, 47(4), 801-819.
Kornai, Janos, Eric Maskin, and Gerard Roland (2003). Understanding the soft budget
constraint,Journal of Economic Literature, 41(4): 1095-1136.
McCarten, William J. (2003). The challenge of fiscal discipline in the Indian States, in Rodden,
J., Eskeland, G.S., and Litvack, J. (eds.),Fiscal Decentralization and the Challenge of HardBudget Constraints, Cambridge, Massachusetts: The MIT Press, 249-286.
Pettersson-Lidbom, Per (2010). Dynamic commitment and the soft budget constraint: An
empirical test,American Economic Journal: Economic Policy, 2(3): 154-179.
Oates, Wallace E. (1972). Fiscal Federalism, New York: Harcourt.
Reingewertz, Yaniv (2010a). Do municipal amalgamations work? Evidence from
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Sadan-Samet, A., 2009. The actual budget process in municipalities, in Ben-Bassat, A., and M.
Dahan (eds.), The Political Economics of the Municipalities in Israel, Jerusalem: The Israel
Democracy Institute (in Hebrew).
Tiebout, Charles (1956). A pure theory of local expenditures, The Journal of Political
Economy, 64(5), 416-424.
Webb, Stephen (2003). Argentina: Hardening the provincial budget constraint, in Rodden, J.,
Eskeland, G.S., and Litvack, J. (eds.), Fiscal Decentralization and the Challenge of Hard
Budget Constraints, Cambridge, Massachusetts: The MIT Press, 189-211.
Wetzel, Deborah and Anita Papp (2003). Strengthening hard budget constraints in Hungary, in
Rodden, J., Eskeland, G.S., and Litvack, J. (eds.), Fiscal Decentralization and the
Challenge of Hard Budget Constraints, Cambridge, Massachusetts: The MIT Press, 393-
427.
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Figure 1: Fiscal Outcomes
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Figure 2: Other Outcomes of Interest
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Current
Deficit
Short Term
Debt(as a share of
Total
Revenue)
(as a share of
Total
Revenue)
1 - 4 5 - 7 8 - 10
Type of Intervention:
- Accountant Over 10% Over 15% 50% 55% 60%
- Recovery Program
Between
17.5% and
50%
- - -
- Summoned Board Over 15% Over 30% 40% 50% 60%
- The rates of tax collection specified in the table regarding the imposition of a summoned board refer to local property taxes. In
addition, a summoned board is imposed if the collection of water bills is below 70%.
- The central government can impose a summoned board also if the local budget has not been approved at the local council within
three months after the beginning of the fiscal year
(by Socio-Economic Index)
Local Tax Collection
TABLE 1
Criteria for Inclusion of Locality on Intervention Program
Notes: Information obtained from the Israeli Ministry of Interior.
- The rates of tax collection specified in the table regarding the imposition of an accountant refer to collection of water and local
property taxes.
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Jewish Arab Jewish Arab Jewish Arab Jewish Arab Jewish Arab
Accountant 6 24 9 29 13 38 22 53 21 53
Recovery Program 54 59 54 53 39 31 32 41 17 33
Summoned Boards 0 0 1 3 2 7 8 17 8 19
Localities under intervention 55 60 54 55 42 48 37 62 28 57
Duration of Intervention:
- 1 year 55 60 7 9 6 6 6 2 7 1
- 2 years 51 53 17 17 15 7 13 4
- 3 years 37 41 12 15 10 8
- 4 years 29 41 12 11
- 5 years 21 41
2004 2005
Note: During the years 2004 - 2008 there were in Israel 120 Jewish localities and 73 Arab localities. Notice that some localities may have more than one type of intervention at any
given year.
2006 2007
TABLE 2
Number of Local Governments under Central Intervention (by Type of Intervention), 2004-2008
2008
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Intervened
during
2004-2008
Never
Intervened
Intervened
during
2004-2008
Never
Intervened
Intervened
during
2004-2008
Never
Intervened
Intervened
during
2004-2008
Never
Intervened
Outcomes of Interest
- Deficit (NIS per capita) 587 215 563 230 381 75 461 62
(635) (532) (528) (402) (611) (296) (713) (168)
- Short Term Debt as a share of Total Revenue 0.259 0.144 0.322 0.217 0.280 0.105 0.470 0.124
(0.175) (0.202) (0.287) (0.181) (0.201) (0.098) (0.347) (0.097)
- Total Economic Expenditures (NIS per capita) 5,069 4,917 3,729 3,927 4,920 5,122 3,609 3,904
(1,759) (1,221) (819) (895) (1,406) (1,433) (610) (823)
- Total Salary Payments (NIS per capita) 1,979 1,975 1,766 1,760 1,796 1,906 1,594 1,634
(706) (613) (460) (511) (644) (587) (400) (441)
- Transfers from Central Government (NIS per capita) 1,343.0 910.4 1,434.4 1,613.0 1,084.0 538.4 1,331.3 1,264.8
(1,195) (779) (611) (692) (1,029) (581) (576) (631)
- Share of Local Property Taxes Collected 0.579 0.694 0.236 0.228 0.531 0.646 0.224 0.217
(0.178) (0.165) (0.158) (0.210) (0.176) (0.175) (0.133) (0.254)
- Percent of students that completed their matriculation 59.5 64.8 51.9 52.2 55.2 62.5 47.1 45.3
(10.9) (9.8) (11.4) (9.7) (15.4) (11.6) (11.4) (17.0)
Control Variables of Interest
- Population Size (in thousands) 35.121 44.204 11.040 9.115 38.926 53.072 12.895 11.543
(87.085) (69.818) (9.459) (8.567) (94.515) (75.990) (10.835) (12.473)
- Socio-Economic Status 5.504 6.554 2.762 2.400 5.497 6.432 2.825 2.029
(1.864) (1.989) (1.023) (1.446) (1.811) (1.936) (0.977) (1.445)
- Share of Largest Party in Municipal Council 0.321 0.415 0.263 0.405 0.317 0.337 0.254 0.446
(0.148) (0.412) (0.142) (0.268) (0.149) (0.140) (0.130) (0.256)
Notes: Data from ICBS.
TABLE 3
Summary Statistics on Localities' Outcomes of Interest - Entire Sample
Jewish Localities Arab Localities
2000 - 2003
Jewish Localities Arab Localities
2004 - 2008
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Arab Localities
Intervened
during
2004-2008
Never
Intervened
Intervened
during
2004-2008
Never
Intervened
Intervened
during
2004-2008
Never
Intervened
Intervened
during
2004-2008
Never
Intervened
Outcomes of Interest
- Deficit (NIS per capita) 290 225 274 77 276 101 220 156
(294) (287) (248) (118) (412) (298) (360) (187)
- Short Term Debt as a share of Total Revenue 0.128 0.123 0.125 0.104 0.176 0.126 0.224 0.185
(0.067) (0.058) (0.075) (0.056) (0.112) (0.064) (0.121) (0.108)
- Total Expenditures (NIS per capita) 4,858 4,544 3,422 3,055 4,774 4,780 3,446 3,015
(1,463) (648) (731) (210) (1,212) (899) (510) (165)
- Total Salary Payments (NIS per capita) 1,752 1,769 1,633 1,452 1,648 1,796 1,482 1,205
(501) (385) (397) (168) (497) (487) (354) (184)
- Transfers from Central Government 1,170.7 795.5 1,400.2 1,150.1 867.2 522.8 1,214.9 807.4
(1,122) (587) (593) (383) (863) (525) (475) (194)
- Share of Local Property Taxes Collected 0.630 0.654 0.293 0.128 0.587 0.589 0.252 0.141
(0.200) (0.167) (0.234) (0.117) (0.202) (0.180) (0.205) (0.119)
- Percent of students that completed their matriculation 62.8 61.0 52.5 50.9 59.749 59.6 47.2 49.1
(11.8) (7.6) (11.3) (9.4) (14.871) (7.0) (12.5) (13.0)
Control Variables of Interest
- Population Size (in thousands) 50.405 41.692 10.857 19.550 56.161 50.323 12.226 24.570
(141.191) (47.971) (8.683) (14.722) (153.211) (51.288) (9.727) (16.993)
- Socio-Economic Status 5.619 6.233 2.536 1.000 5.771 6.108 2.643 1.000
(2.184) (1.511) (1.250) (0.000) (2.067) (1.226) (1.240) (0.000)
- Share of Largest Party in Municipal Council 0.312 0.483 0.311 0.399 0.318 0.301 0.298 0.300
(0.120) (0.722) (0.179) (0.167) (0.110) (0.064) (0.164) (0.035)
Notes: Data from ICBS.
2004 - 2008
TABLE 4
Summary Statistics on Localities' Outcomes of Interest - Only Localities within 7.5 percentage poins of Intervention Threshold
Jewish Localities Arab Localities
2000 - 2003
Jewish Localities
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Deficit per
Capita
- Intervention -27.922 -0.0188 -0.0173 -72.565 *** 0.0451 0.0939 * 0.0739
- Intervention in Jewish Localities -13.6075 0.0223 0.0043 18.3008 -0.0291 -0.0069 -1.0618
- Years of Intervention -38.135 0.0175 -0.0275 *** -34.066 *** 0.0285 ** 0.2172 *** -1.8300 ***
- Years of Intervention in Jewish Localities -65.964 -0.0521 *** 0.0107 -6.5217 -0.0127 -0.0758 ** 1.9840 ***
0.2239 0.9735 0.0004 0.0000 0.0162 0.0000 0.0866
0.0019 0.1310 0.0130 0.0033 0.1020 0.0001 0.3445
0.0022 0.0038 0.0205 0.0049 0.1223 0.0141 0.7277
[87.81]
[116.8]
[49.28]
[58.93]
1,387
Short Term
Debt as Share
of TotalRevenue
Total
Expenditures
per Capita (inln)
Total Salary
Payments per
Capita
Local
Property
Taxes
Collected per
Capita (in ln)
[0.034] [1.386]
[0.054] [0.015] [24.15] [0.034] [1.216]
1,344 1,398 1,3101,396
[0.018] [33.87]
[0.013] [0.516][0.050]
[0.052]
Transfers from
central
government
per capita (in
ln)
[0.052]
Percent of
Students that
finished theirmatriculation
[0.067]
P-value on Effect of Years of Intervention on Jewish Localities
P-value on Effect of Intervention on Arab Localities
P-value on Effect of Intervention on Jewish Localities
Each column in each panel presents the results of a separate panel regression model. All regressions control for each locality number of residents (in logs), average salary for employees (from
previous year), socio-economic status, percentage of seats of larger party and number of parties (divided by number of legislators), as well as years and localities fixed effects. * indicatesstatistically significant at 10% level, ** indicates statistically significant at 5% level; *** indicates statistically significant at 1% level.
[0.034]
1,289
[0.018] [0.007] [14.35]
TABLE 5
The Effect of Central Intervention on Localities Outcomes of Interest - Entire Sample
Number of observations 1,258
[12.69]
[0.011] [0.528]
[0.018] [0.007]
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- Intervention -83.678 0.0302 -0.0201 -80.235 ** -0.0234 0.0701 2.7475
- Intervention in Jewish Localities -95.99 -0.0299 0.0135 71.533 0.0334 0.0083 -5.1228
- Years of Intervention 26.281 -0.0030 -0.0231 -44.352 0.0610 * 0.0761 -2.2464 **
- Years of Intervention in Jewish Localities 39.817 -0.0024 0.0154 51.875 * -0.0749 *** -0.0668 3.2642 ***
0.4254 0.2324 0.0774 0.0071 0.4487 0.0237 0.8354
0.2236 0.8083 0.2269 0.9729 0.9297 0.4043 0.2755
0.3069 0.5995 0.4349 0.7675 0.6137 0.9267 0.2958
Deficit per
Capita
Short Term
Debt as Share
of TotalRevenue
Total
Expenditures
per Capita (inln)
338
[27.91]
[30.53]
[99]
[116]
[45.01]
[67.00]
Transfers from
central
government
per Capita (in
ln)
[0.084]
[0.036]
[0.031]
[39.90] [0.049]
Total Salary
Payments per
Capita
Local
Property
Taxes
Collected per
Capita (in ln)
Percent of
Students that
finished theirmatriculation
[0.035] [47.11]
[0.025] [0.031]
[0.044]
[3.015]
[0.012] [0.018] [1.125]
[0.024] [3.180]
[0.015] [0.017] [1.199]
347 347
P-value on Effect of Intervention on Arab Localities
P-value on Effect of Intervention on Jewish Localities
P-value on Effect of Years of Intervention on Jewish Localities
Number of observations 331 345 340
[0.120]
[0.075]
[0.062]
325
Each column in each panel presents the results of a separate panel regression model. All regressions control for each locality number of residents (in logs), average salary for employees (from
previous year), socio-economic status, percentage of seats of larger party and number of parties (divided by number of legislators), as well as years and localities fixed effects. * indicates
statistically significant at 10% level, ** indicates statistically significant at 5% level; *** indicates statistically significant at 1% level.
TABLE 6
The Effect of Central Intervention on Localities Outcomes of Interest - Including only localities within 7.5 percentage points of Intervention Threshold
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-99.292 0.0248 -0.0666 ** -182.5 ** 0.0989 ** -3.7921 0.0540
-2.9449 -0.0041 -0.0379 *** -101.34 *** 0.0646 5.1074 *** -0.0479
687.24 0.0401 -0.0170 587.1 -0.0588 -3.9212 0.4968 **
-544.429 -0.0139 -0.1419 *** -760.2 * 0.0681 3.5280 -0.3295
-17.3344 -0.0136 -0.0021 -14.5534 -0.0148 -1.1727 0.1244 **
45.133 0.0023 0.0119 29.655 0.0243 -4.1630 *** 0.1110
-68.74 -0.0054 -0.0008 12.5506 -0.0245 -2.1459 0.0580
33.036 -0.0024 -0.0029 -10.3234 -0.0192 1.2529 -0.0194
TABLE 7
(0.683)(0.792)(0.814)(0.465)
(0.581) (0.103) (0.606)
(0.855)(0.222)(0.562)
(0.424)(0.564)(0.899)(0.283)
(0.317) (0.784) (0.958) (0.614)
(0.746) (0.639) (0.0317)
(0.134)(0.001)(0.625)
(0.149) (0.023)
(0.41)(0.232)(0.527)(0.082)
(0.001)(0.001)(0.842)(0.946)
(0.13) (0.181) (0.475) (0.235)
(0.03) (0.224)
347 340 325
(0.185)(0.002)(0.286)
(0.473)
Number of observations 331 345 347
(0.769) (0.621) (0.933) (0.681)
Effect of Recovery Program on Arab Localities
Effect of Years of Recovery Program on Arab Localities
Effect of Recovery Program on Jewish Localities
Effect of Years of Recovery Program on Jewish Localities
(0.0004)(0.721)(0.151)
Effect of Accountant Intervention on Arab Localities
Effect of Years of Accountant Intervention on Arab Localities
Effect of Accountant Intervention on Jewish Localities
Effect of Years of Accountant Intervention on Jewish Localities
(0.286) (0.421) (0.011) (0.296)(0.038)
Transfers from
central
government
(in ln)
Deficit per
Capita
Short Term Debt
as Share of Total
Revenue
Total
Expenditures
(in ln)
Total Salary
Payments
Local
Property
Taxes
Collected (inln)
Percent of
Students with
Bagruyot
338
The Marginal Effect of Each Type of Intervention on Localities Outcomes of Interest - Including only localities within 7.5 percentage points of Intervention Threshold
Each column presents theresults of a separate panel regression model.All regressions control for each locality number of residents(in logs),averagesalary foremployees(fromprevious year), socio-
economic status, percentage of seats of larger party and number of parties (divided by number of legislators), as well as years and localities fixed effects. P-Value of F-Test of joint effect of interest
appears in parentheses below the respective coefficient. * indicates statistically significant at 10% level, ** indicates statistically significant at 5% level; *** indicates statistically significant at 1%
level.
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- Intervention -0.0316 0.0419 -0.0111 -0.0301 -0.0525 ** -0.0335 0.0956 ** -0.0001
- Intervention in Jewish Localities 0.0432 -0.0086 -0.0114 0.0284 -0.0080 0.0245 -0.0581 0.0217
- Years of Intervention 0.0069 -0.0042 -0.0188 * -0.0003 -0.0107 -0.0053 0.0388 0.0155
- Years of Intervention in Jewish Localities -0.0611 *** -0.0683 *** -0.0144 -0.0132 -0.0332 * -0.0118 -0.1116 * -0.0198
0.5631 0.4083 0.0980 0.0843 0.0130 0.0867 0.0088 0.4930
0.0484 0.2339 0.0090 0.3938 0.0021 0.1995 0.7525 0.5983
0.0001 0.0251 0.0016 0.3444 0.0185 0.2369 0.2754 0.8787
Each column presents the results of a separate panel regression model. All regressions control for each locality number of residents (in logs), average salary for employees (from previous year), socio-economic
status, percentage of seats of larger party and number of parties (divided by number of legislators), as well as years and localities fixed effects. * indicates statistically significant at 10% level, ** indicates
statistically significant at 5% level; *** indicates statistically significant at 1% level.
Appendix Table 1
The Effect of Central Intervention on Localities Outcomes of Interest - Entire Sample
1,561 1,425 1,545
[0.024][0.011] [0.012] [0.017]
Number of observations 1,402 1,403 1,566 1,566 1,566
P-value on Effect of Intervention on Arab Localities
P-value on Effect of Intervention on Jewish Localities
P-value on Effect of Years of Intervention on Jewish Localities
[0.016]
[0.021] [0.021] [0.014] [0.057]
[0.036]
[0.021] [0.032] [0.011] [0.014] [0.015] [0.015] [0.029]
[0.025]
[0.057] [0.046] [0.025] [0.023] [0.032] [0.032] [0.129]
[0.057] [0.049] [0.019] [0.022] [0.025] [0.028] [0.046]
Migration (in
ln)
Total Debt as
a Share of
Total Revenue
Debt per
Capita (in ln)
Expenditures
on Education
(in ln)
Expenditures
on Welfare (in
ln)
Salary
Payments on
Education (in
ln)
Salary
Payments on
Welfare
Income from
Water Bills (in
ln)
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- Intervention 0.0219 0.1316 ** -0.0124 -0.0429 -0.0116 -0.0358 0.0826 -0.0732
- Intervention in Jewish Localities -0.0489 -0.1783 *** -0.0070 0.0752 0.0380 0.0514 0.0689 -0.0154
- Years of Intervention 0.0220 0.0191 0.0087 -0.0105 -0.0149 -0.0049 0.1300 * 0.0157
- Years of Intervention in Jewish Localities -0.0287 -0.0261 -0.0129 0.0199 0.0162 0.0051 -0.2052 * -0.0313
0.2359 0.0682 0.9126 0.0536 0.6341 0.3193 0.0438 0.2659
0.3551 0.2976 0.3611 0.3783 0.6010 0.5733 0.4598 0.1061
0.6710 0.8550 0.8090 0.7409 0.9609 0.9896 0.5510 0.7567
The Effect of Central Intervention on Localities Outcomes of Interest - Selected Localities
Appendix Table 2
Each column presents the results of a separate panel regression model.All regressions control for each locality number of residents (in logs), average salary for employees (from previous year), socio-economic
status, percentage of seats of larger party and number of parties (divided by number of legislators), as well as years and localities fixed effects. * indicates statistically significant at 10% level, ** indicates
statistically significant at 5% level; *** indicates statistically significant at 1% level.
347 313 339
[0.037][0.030] [0.031] [0.036]
Number of observations 329 329 347 347 347
P-value on Effect of Intervention on Arab Localities
P-value on Effect of Intervention on Jewish Localities
P-value on Effect of Years of Intervention on Jewish Localities
[0.031]
[0.021] [0.037] [0.029] [0.107]
[0.054]
[0.022] [0.043] [0.033] [0.024] [0.039] [0.030] [0.069]
[0.045]
[0.035] [0.069] [0.047] [0.048] [0.067] [0.068] [0.151]
[0.031] [0.060] [0.038] [0.036] [0.056] [0.060] [0.074]
Migration (in
ln)
Total Debt as
a Share of
Total Revenue
Debt per
Capita (in ln)
Expenditures
on Education
(in ln)
Expenditures
on Welfare (in
ln)
Salary
Payments on
Education (in
ln)
Salary
Payments on
Welfare
Income from
Water Bills (in
ln)
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0.04 147.593 -54.8015 -44.6 *** -108.3904 * -19.1144 34.4766 *** -0.0721 *
0.0453 79.5313 -67.4260 ** -6.33 -68.3997 *** -2.4729 -5.1873 -0.0087
-0.05 -2.36 438.9054 -289.1 77.5993 -21.5120 18.1188 0.1659
0.15 93.698 -657.6481 ** 319.1 ** -183.0100 ** 25.2186 * -356.3456 *** -0.6857 ***
0.0136 68.4621 56.0545 2.2226 53.3983**
1.1353 10.2065-0.0339
0.001 -14.685 76.3128 2.052 53.2268 4.0658 6.7767 -0.0074
-0.0125 6.3704 -7.9333 18.9570 2.6434 1.0418 7.6311 -0.1140
-0.0037 4.373 -13.3337 10.8219 1.7555 -1.6506 0.2213 -0.0157
The Marginal Effect of Each Type of Intervention on Localities Outcomes of Interest - Including only localities within 7.5 percentage points of Intervention Threshold
Each column presents theresults of a separate panel regression model. All regressions control for each locality number of residents (in logs), average salary for employees (from previous year), socio-economic status,
percentage of seats of larger party and number of parties (divided by number of legislators), as well as years and localities fixed effects. P-Value of F-Test of joint effect of interest appears in parentheses below the respectivecoefficient. * indicates statistically significant at 10% level, ** indicates statistically significant at 5% level; *** indicates statistically significant at 1% level.
313 348Number of observations 329 329 347 347 347 347
.(0.989) (0.836)
(0.82) (0.547) (0.107)
Effect of Years of Recovery Program on Jewish Localities
(0.82) (0.96) (0.622) (0.55) (0.922)
(0.325) (0.588) (0.902)
Effect of Recovery Program on Jewish Localities
(0.652) (0.965) (0.777) (0.517) (0.905)
(0.827) (0.4681) (0.554)
Effect of Years of Recovery Program on Arab Localities
(0.963) (0.888) (0.134) (0.839) (0.1)
(0.065) (0.001) (0.001)
Effect of Recovery Program on Arab Localities(0.698) (0.615) (0.189) (0.843) (0.048)
(0.102) (0.631) (0.374)
Effect of Years of Accountant Intervention on Jewish Localities
(0.108) (0.763) (0.0329) (0.036) (0.014)
(0.654) (0.582) (0.644)
Effect of Accountant Intervention on Jewish Localities
(0.463) (0.991) (0.178) (0.124) (0.164)
(0.118) (0.001) (0.064)
Effect of Years of Accountant Intervention on Arab Localities
(0.137) (0.401) (0.011) (0.683) (0.)
Effect of Accountant Intervention on Arab Localities
(0.34) (0.237) (0.352) (0.008) (0.074)
Migration (in
ln)
Total Debt as a
Share of Total
Revenue
Debt per Capita
(in ln)
Expenditures
on Education
(in ln)
Expenditures
on Welfare (in
ln)
Salary
Payments on
Education (in
ln)
Salary
Payments on
Welfare
Income from
Water Bills (in
ln)
TABLE A3