Political Motivations in Government Debt Issuance: Evidence from Mexico

Open Access

Abstract

Do turnover and distributive partisan motivations affect government borrowing more so than traditional funding sources like taxes and transfers? Electoral competition between a variety of parties is critically important for the health of a democratic regime. However, there is an inherent tension between government electoral responsiveness and policy stability. Competing party platforms can have radically different views when it comes to governance, and state institutions need time to meld to the priorities of a new government while maintaining their structural integrity. This tension co-exists with the fact that fiscal strains on governments have risen with growing expectations by citizens of the public sector's responsibilities. These responsibilities can broadly be financed by taxing constituents, borrowing capital, or receiving transfers in the case of subnational governments. Given the lower short-term political costs of debt versus new taxes, the political leaders who manage these public finances may have incentives to borrow, especially when high turnover means their time horizon in office is short or party bases vulnerable to clientelism make cheap capital valuable. Contrary to this assumption, using a regression discontinuity analyzing Mexican mayors who won close elections, I do not find evidence that electoral turnover or partisan motivations affect debt funding. However, I do find support for prior scholarship suggesting partisan motivations in transfers to local governments. These results carry important implications for our understanding of the stability effects of electoral turnover, how parties finance distributive politics, and the fiscal effects of intergovernmental partisan alignment.