Voter Involvement, Fiscal Autonomy and Public Sector Efficiency: Evidence from German Municipalities

Over the last 15 years, a rapidly-expanding body of literature has developed in which it is argued that ‘social capital’ positively affects institutional performance. Engagement in social life is argued not only to increase interest in and understanding of politics, but also to make one more willing and effective in demanding ‘good’ government. Clearly, however, two crucial assumptions have to be met for this argument to hold. Firstly, social engagement should foster political awareness and interest. Secondly, this increased interest and involvement in the political sphere should increase the performance of the incumbent government. While there are several researchers who provide evidence for the first assumption, the validity of the second assumption has received much less attention thus far. The present paper takes a first step to bridge this gap. Using a broad panel of German municipalities we empirically investigate whether voters’ political involvement which can be interpreted as a specific facet of the ‘social capital complex’ improves government performance. We thereby define good government performance as higher efficiency of public service provision or, more negatively, as a reduction in budgetary slack or rent-seeking. The efficiency measure employed is based on the public sector as a whole, rather than concentrating on efficiency in a given area of public good provision: e.g. waste collection, administration, road maintenance, and so on. Moreover, we assess how the participation efficiency nexus is affected by the degree of local fiscal autonomy. Fiscal autonomy is a crucial intervening variable since it implies that voters are effectively confronted with the tax bill for their desires. The empirical results show that higher voter involvement – measured by (1) voter turnout, (2) the existence of so called ‘free voter unions’ in the local council (=local political associations that explicitly reject the idea of being linked to one of the traditional political ideologies), and (3) the ratio of eligible voters to total population – is indeed associated with increased government (technical) efficiency. Moreover, in line with our theoretical predictions, this effect is stronger in communities that have a higher degree of fiscal autonomy. One explanation for the last result is that an active citizenry is likely to put more weight on the careful (i.e. cost-efficient) use of public money when these public funds originate from own revenue sources rather than external transfers.

Geys, Benny, Friedrich Heinemann and Alexander Kalb (2008), Voter Involvement, Fiscal Autonomy and Public Sector Efficiency: Evidence from German Municipalities, ZEW Discussion Paper No. 08-024, Mannheim.