"Unpopular Policies, Electoral Spending, and Undesirable Local Fiscal Outcomes: Evidence from Romanian Austerity

I investigate whether unpopular measures implemented by a central government incentivize electorally-motivated local governments to redistribute public funds from long-term investments to short-run spending. Using constituency-level expenditure data from Romania, I quantify the effects of an austerity policy by which 67 public hospitals were shut-down. I find evidence of a substitution of funds from education and infrastructure investments to residential, as well as cultural, recreational and religious expenditures in governmental areas more strongly impacted by the policy. I find weaker redistributions in opposition constituencies. Further, I find these estimates to be largest in electorally contested areas. The results suggest that undesirable local fiscal redistributions can undermine the effectiveness of unpopular national policies, particularly austerity. The findings can partially explain why such measures often fail to achieve their stated objectives even when implemented with supranational institutional support.