Local government fiscal policy, social capital and electoral payoff:evidence across Italian municipalities

Citizens’ attitudes and reactions to policymakers’ decisions depend on several factors, including informal institutions. The novelty of this paper is to use social capital as a moderator factor to shed light on the relationship between fiscal policies and electoral outcomes. We investigate this relationship using a sample of 6,000 Italian municipalities over the period 2003-2012 and use a Conditional Logit Matching model comparing incumbents to challengers’ characteristics within each election. We find that social capital increases the odds of the re-election of incumbent mayors who adopted a local fiscal policy more oriented towards capital investment (versus current expenditure) and towards property tax (versus income surcharge). This suggests that social capital encourages governmental functions and public policies improving long-term economic commitments, institutional transparency, and accountability. It also shows that decentralization works relatively better with social capital.