The effects of electoral incentives on fiscal policy: evidence from a legislative change at the local government level

Author's Accepted ManuscriptThis paper analyzes how electoral incentives shape fiscal policy, focusing on the introduction of mayoral term limits in Portugal. Applying a difference-in-differences approach, we find evidence that when a municipality has a term-limited (TL) mayor, it experiences a fall in revenues and expenditures. The effect seems to be driven by lower effort of lame-duck mayors, relative to reelection-eligible ones, to implement new investments and to obtain conditional grants from the central government, especially in election years. Although lame ducks are less opportunistic in general, the results suggest that opportunism may not decrease in municipalities whose TL mayors resign before the end of their terms and are replaced by their (eligible) vice-mayors.The authors thank Henry Chappell, Toke Aidt, Susana Peralta, Fabio Padovano, Mariana Lopes da Fonseca, Joao Cerejeira, Miguel Portela, Antonio Tavares, Albert Sole -Olle , Daniele Bondonio, Erik Snowberg, and two anonymous referees for their very helpful comments, and Bruno Fernandes and Joao Martins for their excellent research assistance. We are grateful for the financial support of Fundacao Francisco Manuel dos Santos. This work was also carried out within the funding with COMPETE reference POCI-01-0145-FEDER-006683 (UID/ECO/03182/2013), with the FCT/MEC's (Fundacao para a Ciencia e a Tecnologia, I.P.) financial support through national funding, and by the ERDF through the Operational Programme on "Competitiveness and Internationalization"-COMPETE 2020 under the PT2020 Partnership Agreement