The role of fiscal sustainability and strategic public policy on local governments' performance.

Thanks to the subsidiarity principle municipalities play a key role in local service provision. The expanding local expenditures challenge municipalities to balance between the interests of citizens and fiscal sustainability imposed by higher governments. Moreover, local policy decisions might also be influenced by neighbouring jurisdictions’ choices and incumbents’ strategic behaviours. These conflicting angles possibly result in increased spending and inefficient local public management. Although earlier political economy literature assessed the causal impact of fiscal rule enforcement and strategic behaviour on several policy outcomes, it ignored efficiency as a mechanism. The local government efficiency literature overlooked endogeneity issues in the model specification such that only correlational evidence is obtained. To unravel the complex interactions of factors influencing municipal decisions and to estimate their causal impact on municipal performance, more advanced and flexible tools are needed.From an empirical perspective, this research provides new evidence on the consequences of an exogenously imposed budget balance rule and of strategic policies on municipal performance. From a methodological perspective, we integrate state-of-the-art tools from the impact evaluation literature together with advanced stochastic frontier and machine learning techniques, to offer an enhanced framework for municipal performance analysis.

Keywords:Local governments’ performance and fisca, Incumbent strategic policy behaviour, Impact evaluation in efficiency and mach

Disciplines:Public economics, Econometric and statistical methods and methodology, Mathematical methods, programming models, mathematical and simulation modelling, Public management