Single‐Party Rule, Public Spending, and Political Rents: Evidence from Finnish Municipalities*

Date01 April 2019
Published date01 April 2019
AuthorJaakko Meriläinen
DOIhttp://doi.org/10.1111/sjoe.12288
Scand. J. of Economics 121(2), 736–762, 2019
DOI: 10.1111/sjoe.12288
Single-Party Rule, Public Spending, and
Political Rents: Evidence from Finnish
Municipalities*
Jaakko Meril¨ainen
Stockholm University,SE-106 91 Stockholm, Sweden
jaakko.merilainen@iies.su.se
Abstract
In this paper, I investigate the differences in public spending and extraction of political rents
between single-party and coalition governments. Common pool theories predict that coalitions
tend to spend more and extractmore rents than single-party governments.Using data from Finnish
municipalities for the years 1997–2012 and a regression discontinuity design approach tailored
for proportional elections, I provide causal evidence consistent with the theoretical predictions.
Keywords: Common-pool problem; government composition; local government; regression
discontinuity design
JEL classification:D72; H71; H72; R50
I. Introduction
Do single-party and coalition governments behave differently in terms
of public spending and the way that it is financed? The composition
of the government might have a considerable impact on the magnitude
of public spending. So-called common-pool models suggest that coalition
governments tend to spend more than single-party governments. Weingast
et al. (1981) were the first to propose a “pork-barrel” model with multiple
local groups or political actors who can independently decide how much
they spend. The benefits from this spending are local, but the spending
is financed from a common pool of global tax revenues, which results in
a higher equilibrium spending when a larger number of groups make the
decisions. In a more recent contribution, Persson et al. (2007) suggest that
a common-pool problem arises from electoral competition inside coalition
*This paper is based on my Master’s thesis. I thank Juuso Meril¨ainen, Matti Mitrunen,
Tuukka Saarimaa, Riikka Savolainen,Salla Simola, Janne Tukiainen, Roope Uusitalo, and three
anonymous referees for valuable feedback. I also thank Sirkka-Liisa Piipponen from Kuntaliitto
for providing data on local politicians’ compensations, and Christina L¨onnblad for editorial
assistance.
C
The editors of The Scandinavian Journal of Economics 2018.
J. M er il ¨ainen 737
governments. The theoretical framework can be extended further (Persson
et al., 2003a) to show that there is more rent extraction under a coalition
rule compared with a single-party rule – while rent extraction from the
common pool only benefits the party responsible for it, voters’ punishment
is distributed across all governing parties. This study contributes to the
literature by providing causal evidence of a common-pool problem in public
spending and the extraction of political rents using data from units with
the same institutional background, namely Finnish municipalities, and a
regression discontinuity design (RDD) specifically tailored for proportional
elections.
Whereas the common-pool problem in public spending has already been
analyzed in numerous studies (Roubini and Sachs, 1989a,b; de Haan and
Sturm, 1997; Perotti and Kontopoulos, 2002; Bawn and Rosenbluth, 2006;
Persson et al., 2007; Schaltegger and Feld, 2009; Le Maux et al., 2011; de
Haan et al., 2013; Freier and Odendahl, 2015), the common-pool problem in
politicians’ rent extraction is an understudied question.1However, there are
some previous studies evaluating rent extraction within the legal framework
(Di Tella and Fisman, 2004; Svaleryd and Vlachos 2009; Benito et al.,
2014). I find that a single-party rule decreases the expenditures and the
revenues per capita by roughly 7–15 percent, although the estimates come
with rather wide confidence intervals. I also show that a single-party rule
decreases the rent extraction proxied by the annual compensations paid to
leading local politicians (chairmen of municipal boards who are comparable
to mayors in many political systems), which the local councils are allowed
to set themselves without any restrictions. The estimates suggest that single-
party control decreases rents by 15–30 percent.
In order to causally estimate the effects of single-party control, I build
up a (fuzzy) RDD (Imbens and Lemieux, 2008; Lee and Lemieux, 2010)
relying on the assumption that close elections are as good as random. The
first researchers to use this approach in the context of elections include
Petterson-Lidbom (2008) and Lee et al. (2004). Since then, RDD has
been used to analyze the political and economic consequences of electoral
outcomes in a number of studies.2Implementing an RDD in a proportional
representation system is not straightforward. Whereas RDD studies using
data from two-party systems simply use vote shares as the running variable,
the seat division depends on votes in a complex way in proportional
1Many studies report that the common-pool problem is present also when merging local
governments. Some examplesinclude Hinnerich (2009), Jordahl and Liang (2010), and Saarimaa
and Tukiainen (2015).
2For some examples, see Lee et al. (2004), Lee (2008), Gerber and Hopkins (2011), Ferreiraand
Gyourko (2014), and Meyersson (2014). See also Caughey and Sekhon (2011) for an extensive
list with some of the previous work.
C
The editors of The Scandinavian Journal of Economics 2018.

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