Do local elections affect the spending of intergovernmental transfers? Evidence from Germany’s stimulus package of 2009

In this paper, we study whether local spending of intergovernmental grants is influenced by mayoral elections in the grant receiving municipality exploiting the implementation of the German federal government’s second economic stimulus package of 2009 (K2) in the state of Baden-Wuerttemberg as natural experiment. This package provided lump-sum grants for local public investment to all municipalities in Baden-Wuerttemberg. Applying difference-in-differences and instrumental variables approaches, we provide evidence that, in the absence of an election, K2 grants led to an increase in a municipality’s long-run investment spending, while municipalities in which the incumbent mayor stood for re-election used grants to increase both, long-run and rapidly visible short-run investment expenditures. Moreover, we provide evidence supporting the flypaper effect for all municipalities, except for those in which the incumbent mayor did not seek re-election.