ACCOUNTABILITY AND INCENTIVES OF APPOINTED AND ELECTED PUBLIC OFFICIALS Zohal Hessami*

Abstract—Political agency models suggest that elected public officials of government exist: the council-manager system (the man- choose different policies than appointed officials do. This paper is the first (a) to apply a clean empirical design to study whether the selection rule has ager is appointed by the city council) and the mayor-council a causal effect on public officials’ policy choices and (b) to investigate trans- system (the mayor is elected by voters).2 The majority of mission channels. I exploit a unique setting in Germany, where a reform has these studies use municipal spending in one or two U.S. created quasi-experimental variation in the selection rule for mayors. As the outcome variable, I use data on grant receipts for highly visible investment states as the outcome variable. The results are mixed: some projects for which mayors must apply to the state government. Elected may- find that mayor-council cities spend more than council- ors attract 7% to 7.4% more grants in election years; for appointed mayors, manager cities (Booms, 1966; Lineberry & Fowler, 1967), there is no cycle. Using hand-collected data on mayor characteristics, I find suggestive evidence that although the selection of mayors changes follow- while others reach the opposite conclusion (Clark, 1968; ing the reform studied, a likely reason for the observed cycle is that elected Coate & Knight, 2011; Sherbenou, 1961) or find no effect mayors have stronger electoral incentives. (MacDonald, 2008). A limited number of studies focus on other outcome variables. Levin and Tadelis (2010) find I. Introduction that privatizations take place more often in council-manager cities than in mayor-council cities. Vlaicu and Whalley central question in political economy is how to select (2016) are the first to consider political cycles: elected may- Apublic officials. Public officials may be appointed by ors hire more police officers in election years to please an elected body, such as a legislature, or directly elected voters who value security. This is not the case in cities with by voters. The way in which public officials are selected appointed mayors. Enikolopov (2014) focuses on patronage is likely to affect policy choices for two reasons. Based on as a tool for targeted redistribution and provides evidence political agency models, it is plausible that elected public that the number of public employees is larger in mayor- officials face stronger incentives to perform well in office council cities than in council-manager cities, especially in and have characteristics that make them more appealing to election years.3 voters than appointed public officials (Besley, 2006; Persson Although the literature on mayor-council and council- & Tabellini, 2000).1 This is the first study to explore whether manager cities offers compelling results regarding the impor- there is a causal effect of the selection method for an impor- tance of the selection rule for policy choices, it has to tant type of public official, local government executives, on confront a number of empirical difficulties. First, citizens policy choices and to investigate underlying mechanisms. in U.S. municipalities can choose their form of government Previous literature on the selection method for local exec- in a local referendum that may give rise to reverse causality.4 utives focuses on U.S. municipalities, where two main forms A second issue is cotreatment: managers and mayors in the United States differ not only in the way they are selected. Received for publication September 9, 2015. Revision accepted for publication February 22, 2017. Editor: Brigitte C. Madrian. Managers are typically nonpartisan bureaucrats required to * University of Konstanz. have a professional background in public administration. I am grateful to two anonymous referees, Toke Aidt, Massimo Bordignon, Mayors are professional politicians endowed with more for- Daniel da Mata, Patricia Funk, Christina Gathmann, Krisztina Kis-Katos, 5 Gabriel Leon, Jo Thori Lind, Stephan Litschig, Raffaele Miniaci, Christoph mal powers to influence policy decisions than managers. A Schaltegger, Julia Shvets, Steven Stern, Thomas Stratmann, and seminar third difficulty is measurement error: official information on participants at a Political Economy Workshop at Jesus College in Cam- bridge, the 2013 Silvaplana Workshop, the 2013 Asian Meeting of the Econometric Society in Singapore, the 2013 Xmas Meeting of German 2 According to Enikolopov (2014), two-thirds of all U.S. cities can be clas- Economists Abroad in Konstanz, the 2014 EPCS Meeting in Cambridge, sified into these two types. The remaining ones are cities with commission, the 2014 RES Meeting in Manchester, the 2014 IIPF Meeting in Lugano, town meeting, or representative town meeting forms of government, as well the 2014 EEA Meeting in Toulouse, the 2014 VfS Meeting in Hamburg, and as counties with commission form of government. seminars in Bamberg, Brescia, Dortmund, Gothenburg, Heidelberg, Kiel, 3 Besides these studies on the form of local government, there is also and Lund for many helpful suggestions. Tobias Steinhauser has provided a related literature on the selection method for officials in other areas of excellent research assistance. I thank Ulrich Dressler and Stephan Ostgen the public sector. Choi, Gulati, and Posner (2008) show that while elected (Ministry of the Interior and Sports) and Horst Hiess (Ministry of Finance) judges write more opinions than appointed ones, their opinions tend to be for answering my questions about institutional details in Hesse. I thank the of lower quality (see also Iaryczower, Lewis, & Shum, 2013, and Lim, University of Cambridge and Universitat Pompeu Fabra for the hospitality 2013). Besley and Coate (2003) find that elected regulators choose more they extended to me during research visits in 2013 and 2014. I acknowledge pro-consumer-friendly policies than appointed ones. Other public officials funding from the Young Scholar Fund. for whom selection rules have been explored are school superintendents A supplemental appendix is available online at http://www.mitpress (Partridge & Sass, 2011) and city treasurers (Whalley, 2013). journals.org/doi/suppl/10.1162/REST_a_00684. 4 One notable attempt to address endogeneity is the use of precipitation 1 This is also supported by empirical studies that show that policy choices shocks as an instrument for changes in the form of government (Vlaicu & are affected by selection and incentives of officeholders due to term lim- Whalley, 2016). its (Alt, Bueno de Mesquita, & Rose, 2011; Besley & Case, 1995; List & 5 The two main forms of government in the United States may also differ in Sturm, 2006) and the type of electoral rule (e.g., proportional versus plural- other respects, as any detail can be changed in a local referendum. Recently, ity rule) that is applied (Funk & Gathmann, 2013; Gagliarducci, Nannicini, many council-manager cities have also selected a mayor who serves on the & Naticchioni, 2011; Persson and Tabellini, 2003). council but has less political influence than a mayor in a mayor-council city.

The Review of Economics and Statistics, March 2018, 100(1): 51–64 © 2018 by the President and Fellows of Harvard College and the Massachusetts Institute of Technology doi:10.1162/REST_a_00684

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the form of government in U.S. cities is not available. The is prepared and submitted by its mayor. Therefore, grant studies therefore rely on administrative surveys, which have receipts directly depend on mayors’ effort and competence, been shown to provide diverging classifications for some and mayors can claim exclusive credit for grant receipts. municipalities, in turn leading to contradictory empirical This is supported by anecdotal evidence that mayors utilize results (Coate & Knight, 2011).6 their success in attracting investment grants in their electoral In this paper, I exploit a quasi-experiment at the level campaign via the local media.8 On the other hand, spending of German municipalities to study the effect of the selec- and police hiring are not under the direct control of may- tion rule for mayors on their policy choices. Following a ors in my context. Second, investment grants are restricted statewide referendum in 1991, municipalities in the German to public projects that happen to be highly visible to voters state of Hesse switched from mayor appointment to direct (e.g., day care facilities, road construction). A third contri- mayor elections between 1993 and 1998. The end of the bution is that I combine official election and fiscal data at term of the last appointed mayor varies across municipali- the municipality level with hand-collected information on ties for exogenous historical reasons that are orthogonal to individual mayors. Data on mayor appointments (e.g., dates, municipality characteristics. This randomization determines identities of mayors, party affiliations) are not available from the timing of the switch in a particular municipality. At the an official source. Similarly, there is no official information same time, the reform did not change the balance of power on the education level, occupational background, and age and responsibilities between the mayor and the local coun- of elected or appointed mayors. This unique combination of cil. Finally, official information on how mayors are selected data allows me to investigate transmission channels. is available for all municipalities in each year of the sample Political agency models provide a useful theoretical back- period.7 ground to think about the effect of the selection rule for This paper makes three substantive contributions to the mayors on investment grant receipts. First, mayors may have literature. First, the reliance on a natural experiment and the stronger incentives to perform well when they are elected. availability of administrative data on the mayor selection rule Given that voters can oust them from office if they perform in a given municipality and year allow me to identify the poorly, elected mayors may be less susceptible to moral haz- causal effect of direct elections on mayors’ policy choices. ard and exert more effort to attract transfers (Barro, 1973; Specifically, these features allow me to circumvent the three Ferejohn, 1986). Direct elections may also incentivize may- problems in the existing literature on the form of govern- ors to signal their competence to voters prior to an election. ment reviewed above (reverse causality, cotreatment, and Following Rogoff and Sibert (1988) and Rogoff (1990), such measurement error). A second contribution of my study is incentives would lead to political budget cycles in investment that I use a new outcome variable to analyze policy choices. grants. Second, elected mayors may attract more transfers U.S. studies use municipal spending and public employment because they have different characteristics than appointed as the outcome variable. I use investment grant receipts for mayors do. If the preelectoral signaling as modeled in Rogoff several reasons. First, a municipality may receive a grant for and Sibert (1988) and Rogoff (1990) is effective, candidates an investment project if and only if a detailed application elected into office may be more competent and therefore more efficacious in attracting additional grants even if incen- 6 While measurement error may seem like a minor issue at first sight, tives had not changed. More generally, the candidate pool studies indicate that estimates for the relationship between the form of government and public spending depend decisively on the accuracy of clas- may be endogenous to the selection method for the mayor’s sifications for the form of government. MacDonald (2008) and Coate and office, and voters may be more likely to select competent Knight (2011) use a similar sample and estimation techniques but reach mayors than party officials (Besley, 2005). different conclusions: MacDonald (2008) finds no differences, while Coate and Knight (2011) find that spending is higher in council-manager cities. In line with these theoretical considerations, I find that in Coate and Knight (2011) explain this as follows: “The differences appear to an election year, elected mayors attract on average 7% to be driven by differences in the switching measure used. While MacDonald 7.4% more investment grants for their municipality from the used a measure based upon comparison of reported government form across 9 survey years, we use a more conservative measure based upon a reported state government. For appointed mayors, there is no cycle. change in form of government” (p. 105). 7 I am not the first to analyze reforms of mayor selection in Germany. Previous studies investigate the effect of presidentialism/parliamentarism 8 One example is an article in a local newspaper, “Mayor Election in or the use of the plurality/proportional rule on fiscal outcomes at the local Langen—Frieder Gebhardt Starts the Electoral Campaign,” December 7, level. Blume, Doering, and Voigt (2008) find that when mayors are elected, 2013. The mayor strategically mentions his success in attracting invest- local spending and revenues decline in municipalities in Schleswig-Holstein ment grants and lists several infrastructure projects: “When he looks back and converge toward municipalities in Baden-Wuerttemberg, where mayors on his six years in office, he thinks: ‘It is great what we managed to have always been elected. Since expenditures are aggregated at the state get done.’ Examples are the successful town hall project, the reconstruc- level, however, the observed effects cannot be disentangled from state- tion of the gymnasium ..., the reconstruction of a child care facility specific effects. Ade (2013) focuses on three German states and provides and the construction of an additional childcare facility” (http://www.op evidence that tax rates are lower and public spending is higher in cities -online.de/lokales/nachrichten/langen/buergermeisterwahl-langen with elected mayors. Egger, Koethenbuerger, and Smart (2007) analyze the -frieder-gebhardt-spd-eroeffnet-wahlkampf-3259423.html). introduction of mayor elections in Lower Saxony, which was accompanied 9 This paper also contributes to an emerging empirical literature on polit- by a large increase in the power and responsibilities of mayors. This reform ical budget cycles that are conditional on institutional features at the level therefore resembles a move from the U.S.-style council-manager system of subnational governments (Aidt & Mooney, 2014; Aidt, Veiga, & Veiga, to the mayor-council system. The authors find that redistributive spending 2011; Akhmedov & Zhuravskaya, 2004; Sjahrir, Kis-Katos, & Schulze, increases with mayor elections. 2013).

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Using hand-collected data on mayor characteristics, I also presents the results for several extensions. Section VII present suggestive evidence for electoral incentives rather concludes. than selection as a more relevant explanation for the cycle in my setting. First, the estimate for the cycle in investment II. Theory grants hardly changes when I control for mayor character- istics. Second, I show that for the subset of mayors who Political agency models suggest two mechanisms for were in office in both regimes, the estimate is similar to the an effect of selection rules on policy choices: electoral baseline estimate. incentives and selection. This section reviews theoretical Three extensions to the baseline specification validate my contributions on these mechanisms to derive a prediction main findings. First, I show that when only considering elec- on the effect of the selection rule for mayors on investment tions that take place late in a year, the increase in investment grant receipts.11 grants in election years is as high as 11%. Second, the last In first-generation political agency models, pioneered by cohort of appointed mayors that faced a direct election for Barro (1973) and Ferejohn (1986), elections motivate office- the first time was particularly motivated to attract transfers, holders to exert effort on behalf of voters. For example, in presumably due to the expectation that voters prefer different Ferejohn (1986) voters adopt a simple decision rule where types of mayors. In the year of the first direct elections, the they reelect an incumbent only if her policy choices ensure a increase in investment grant receipts amounts to about 10%. level of utility that is above a certain threshold. The incum- Third, I provide further evidence that electoral incentives bent thus faces electoral incentives to exert sufficient effort are mainly responsible for the cycle by exploring the issue to reach this level. of divided government. Electoral incentives of mayors are In second-generation agency models, such as Rogoff and likely lower under divided government because voters may Sibert (1988) and Rogoff (1990), voters prefer to reelect be less likely to attribute investment grant receipts only to competent incumbents but cannot directly observe compe- the mayor. A council dominated by opposition parties may tence. They know, however, that competent incumbents are try to claim credit for any additional grants. Conversely, the more capable of temporarily manipulating fiscal variables. mayor may attempt to shift the blame to the council if she Public officials thus have an incentive to create political fails to attract them. In line with this argument, I observe a budget cycles by choosing low tax rates or high public cycle only for the subset of elected mayors who do not face expenditures before an election to signal their competence. a divided government.10 Rogoff and Sibert (1988) and Rogoff (1990) show that such The findings in this paper are interesting not only because preelectoral manipulation can result in separating equilibria they provide credible causal evidence that the selection where only competent officials are retained by voters. Conse- method for public officials such as mayors affects policy quently, elections may also affect policy choices by making choices (internal validity), but also because the Hessian set- it more likely that competent candidates are selected into ting has more general relevance (external validity). Many office.12 other German states (and even countries such as Italy) have In view of this literature, it is plausible that a switch from recently replaced mayor appointments with mayor elections. appointment to direct election leads to higher investment From a policy perspective, it is important to know whether grant receipts. First, elected mayors arguably have stronger and how the switch has affected policy choices of mayors. electoral incentives than appointed mayors. When mayors However, other settings are not as amenable to a causal anal- are elected, the link between mayors’ policy choices and ysis of this question. The switch to directly elected mayors their probability of reelection is immediate. Thus, elected in other German states, for example, was typically accom- mayors face incentives to attract more transfers, in partic- panied by a change in mayors’ competencies. By isolating ular when an election is imminent. In contrast, voters can the effect of the selection rule from other concurrent changes hold appointed mayors accountable only in an indirect way. to the responsibilities of the mayor, the results in this paper When an appointed mayor performs poorly, voters can only allow us to better understand the specific implications of attempt to oust him from office by voting in the next council various reforms to this public office that typically happen elections for a party that is opposed to the mayor. Yet in simultaneously. council elections, voters cast their vote based on a broader The remainder of this paper is structured as follows. Section II discusses the theoretical background. Section 11 Note that an older literature in industrial organization suggests an ambiguous prediction for this relationship. The argument there is that while III provides information on the institutional background. elected officials are subject to a reelection constraint, appointed officials Section IV describes the empirical strategy and the data. are subject to a comparable reappointment constraint. Thus, elected and Section V reports the main estimation results. Section VI appointed officials may face ultimately the same incentives and choose the same policies to please the median voter (Baron, 1988; Deno & Mehay, 1987; Laffont, 1996). 10 One may also suspect that municipalities received extra funds from the 12 That selection may affect policy choices is argued even more explic- state tier when they switched to the new regime as compensation for reform- itly in citizen-candidate models on agency where voters elect candidates related expenses. However, it is unlikely that such additional resources according to their characteristics because voters anticipate that candidates would be channeled through the investment grants program. I am also not with certain characteristics are committed to specific policies (Osborne & aware of any such grants having been allocated. Slivinski, 1996; Besley & Coate, 1997).

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set of policy outcomes (see section IIIA for more details on Hessian municipalities provide their citizens with a num- the responsibilities of the council) and an appointed mayor ber of goods and services, the provision of which is either may therefore have smaller incentives to attract grants.13 Sec- voluntary or compulsory. Compulsory provision includes ond, the switch to direct elections may lead to an increase primary schooling, municipal day care services, and civil in investment grants through the selection of mayors. The protection. Voluntary provision includes swimming pools, introduction of mayor elections may induce a more compe- sports venues, and hospitals. Public provision of goods and tent breed of candidates to run for the mayor’s office for the services at the municipal level is financed with municipal following reasons: the personal characteristics of candidates taxes, user fees, and transfers. In 2013, Hessian munici- have become more salient, candidates are more exposed to palities had 15.5 billion euros at their disposal. General the public in a personalized election campaign, and elected expenditures are financed through taxes and transfers, while mayors are more likely to enjoy personal satisfaction from user fees are charged for specific services. Transfers from attaining office. In addition to the increase in average com- the state tier make up a large fraction of municipal rev- petence in the candidate pool, direct elections may increase enues. There are various transfer programs, which I describe the likelihood that more competent candidates are elected in section IIIC. into office because voters might be more likely to choose The municipal code of Hesse (Hessische Gemeindeord- such candidates than party elites (Besley, 2005). Given that nung)—the magistrate constitution—stipulates that the local elected mayors are on average more competent, it is possible council is in charge of key decisions and monitors the over- that elected mayors are more effective in attracting transfers all administration.16 The council can, however, hand over than appointed mayors are. some decisions to the mayor. The mayor usually works To summarize, elected mayors may attract more trans- full time and is supported by two individuals who work fers than appointed mayors because elections give rise to in an honorary capacity. Together they form the magis- stronger electoral incentives and a more competent selec- trate.17 The mayor is present at council meetings and is tion of mayors. First-generation agency models predict that entitled to voice her opinion even though she does not have a transfers will be higher over the entire term. This prediction vote. also follows from second-generation models since elections may lead to the selection of more competent officeholders. B. The Transition from Mayor Appointments Second-generation models also predict that grant receipts are to Mayor Elections particularly high in election years.14 The introduction of mayor elections in Hesse was a rather unexpected reform that was strategically placed on III. Institutional Background the agenda during an electoral campaign at the state level. A. Municipalities, Mayors, and Local Public Finances At the end of the 1980s, the Christian-Democratic pres- ident of Hesse, Walter Wallmann, initiated parliamentary Hesse is among the more prosperous states in the Ger- deliberations that culminated in a referendum on the intro- man federation and has been ruled by both left-wing and duction of mayor elections. This came as a surprise since this right-wing governments. The population size of Hesse was reform was not popular with the ruling conservative-liberal 6.1 million at the end of 2012 (about 7.6% of the German parties (CDU and FDP), but it was with left-wing parties. population). Hesse consists of 421 regular municipalities Political observers have interpreted Wallmann’s move as a and 5 exceptionally large municipalities that have a spe- strategic maneuver in the run-up to the state election on Jan- cial status and therefore assume both municipal and county uary 20, 1991. It is therefore also no coincidence that the responsibilities.15 referendum took place on the same day as the state elec- tion (von Arnim, 2002). Yet, not only was the referendum unexpected; so was the popularity of this reform: 82% of 13 The policy choices of appointed mayors are more likely to be deter- voters supported the reform. The relevant laws were finally mined by nonelectoral career concerns (Alesina & Tabellini, 2007). For changed in May 1992. The reform was hence not based on an appointed mayor who wants to retain her position, for example, (par- tisan) loyalty to the council majority may be more important than any considerations to motivate mayors to exert more effort in success in attracting grants. Alternatively, for an appointed mayor whose applying for state grants. It was simply a strategic maneuver career options include a possible switch to the private sector or a promotion to win the support of a broader group of voters for the state to higher office, it may be more important to be perceived as a profes- sional administrator who is able to ensure the smooth functioning of the election. administration rather than helping the council majority get reelected. For historical reasons, the introduction of mayor elec- 14 Note that in Rogoff-type agency models of the rational political bud- tions (and the start of the terms of the first elected mayors) get cycle, electoral cycles are due to both selection and accountability effects. Yet evidence for an electoral cycle could also be consistent with an accountability-only agency model if voters are forgetful, as in Findley 16 The council is elected from party lists under a single-district propor- (2015). tional election rule and is headed by an elected chairman, who presides 15 Since these five municipalities (Darmstadt, Frankfurt, Kassel, Offen- over council meetings. bach, and Wiesbaden) are not comparable to the 421 regular municipalities 17 The size of the magistrate is determined by the municipality itself. due to their special status, I exclude them from the empirical analysis. Especially in large cities, there may be more than three magistrate members.

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was spread out between 1993 and 1998.18 Two important of the selection method for mayors on policy choices.23 First, sources of this variation are the initial asynchronous dates for the powers and responsibilities of Hessian mayors were not mayor appointments in 1946 and 1947 and municipal merger changed by the reform. This is different in other German reforms in the 1970s. According to the Hessian municipal states that later introduced mayor elections. A second advan- code (§42, HGO), the appointment or election of a mayor has tage is that the timing of the switch varies across Hessian to take place three to six months before the incumbent steps municipalities for exogenous historical reasons. These two down.19 Hence, some of the variation is due to the auton- unique features allow for a clean identification. omy that municipalities have in choosing the date within this three-month window and the way in which the dates are C. Allocation of Investment Grants shifted further and further apart over the decades. Another reason is that some mayors have not served a full term often The German constitution requires that citizens have some for reasons beyond their control (death, sickness, retirement, minimum living standard regardless of where they live.24 or dismissal by the council).20 After the last appointed mayor Within each German state, this principle is reflected by in a municipality had completed her six-year term, the first a municipal equalization scheme (Kommunaler Finanzaus- directly elected mayor took office. gleich). These schemes require that the state government The introduction of mayor elections has not affected the provides poorer municipalities and municipalities that face division of formal powers and responsibilities. The reform a higher burden of public provision of goods and services has, however, removed the dependence of the mayor on the with the necessary financial means. local council. This independence also comes at a cost for the The first step in the municipal equalization scheme is the incumbent mayor. When running for reelection, the incum- determination of the total amount of resources to be allo- bent mayor can no longer rely on the entrenched majority of cated, which varies from year to year. It equals 23% of the her party in the council.21 state government’s total revenues from the income tax, the While the role of mayors is mostly limited to the exe- corporate tax, the sales tax, the wealth tax, the motor vehicle cution of council decisions (see section IIIA), the reform tax, the property acquisition tax, and the apportionment of of mayor selection is nevertheless likely to have affected the business tax, plus any additional resources that the state policy outcomes in Hessian municipalities. As I describe in government may wish to add. In 2013, the state government section IIIC, mayors are responsible for the preparation and allocated 3.8 billion euros by the municipal equalization submission of applications for state investment grants. They scheme. can submit these applications without permission by the More than half of these resources are allocated to council.22 Hessian municipalities via general-purpose grants (Schlüs- This paper focuses on Hessian municipalities for two rea- selzuweisungen), which are allocated according to specific sons that make Hesse a compelling setting to study the effects rules that into account the fiscal need and the fiscal capacity of each municipality. The fiscal capacity measure reflects the 18 The first mayor elections took place on May 2, 1993, in Alsfeld, Borken, hypothetical tax-raising potential of a municipality, while Gudensberg, Lauterbach, Ottrau, and Waldems. The last municipality that the fiscal need measure is a function of a municipality’s held its first mayor election was Melsungen on November 8, 1998. population size.25 19 If a term ends prematurely for unforeseen reasons, it has to take place within four months. Special-purpose grants (besondere Finanzzuweisungen) 20 To give an example, the first mayor of Hanau (Karl Rehbein) was differ from general-purpose grants since they are tied to appointed twice by the local council but died after ten years in office, two a particular purpose (e.g., schooling, day care facilities, years ahead of the end of his second term. The second mayor (Heinrich Fischer) served a full term of six years. The third mayor of Hanau (Herbert Dröse) was elected twice into office but retired in the middle of his second 23 The reform in Hesse had an impact on West German local politics term. The fourth mayor of Hanau (Hans Martin) served two full terms. After- beyond the boundaries of Hesse. Other German states where mayors had ward, Helmut Kuhn was in office for only about sixteen months before he traditionally been appointed followed suit after the Hessian reform. Only was dismissed by the local council. Finally, Hans Martin was elected again in Bavaria and Baden-Wuerttemberg had mayors always been elected since into office two times before retiring three years ahead of the end of his last World War II. Mayor elections were introduced in Rhineland-Palatinate in term. 1993, North-Rhine Westphalia and Saarland in 1994, Schleswig-Holstein 21 Before the reform, the mayor was appointed by the local council via in 1995, and Lower-Saxony in 1996. a two-thirds majority vote. The council was able to remove the appointed 24 This is not explicitly stated in the constitution, but various provisions mayor from office if it wished to do so. Since the reform, the mayor is elected are usually interpreted accordingly. Specifically, Article 72, §2 of the Basic by the people. If no candidate receives an absolute majority of votes, a run- Law in its current wording states that the federal government may adopt off election takes place with the two most successful candidates of the first legislation in a broad range of policy areas if such legislation is necessary round running against each other. Note that turnout in council elections has to ensure similar living conditions (gleichwertige Lebensverhältnisse)in decreased from an average of 78% in the prereform period to 61% in the the federation. Article 106, §3.2 mentions similarity of living conditions postreform period, which indicates that the introduction of mayor elections (Einheitlichkeit der Lebensverhältnisse) as one goal the federal revenue- may have given rise to some degree of voter fatigue. sharing scheme must strive to achieve. 22 Given this particular role of mayors in Hesse, using other outcome 25 When fiscal need exceeds fiscal capacity, a certain fraction of this dif- variables such as municipal tax rates and spending or even nondiscretionary ference is compensated with a grant that is allocated to the municipality outcomes such as rule-based transfer receipts can serve to further validate in question. Any shortfall of fiscal capacity below 80% of the fiscal need my estimation results for investment grants via placebo tests. In online measure is completely equalized. When fiscal capacity exceeds fiscal need, appendix B, I provide estimation results showing that none of the other a municipality nevertheless receives a minimum amount of general-purpose fiscal outcomes are affected by the reform of mayor selection. grants. This minimum is a function of population size.

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nursery schooling, youth welfare services, social welfare, awarded the grant. The decision is usually taken by the public transport, theaters, museums, libraries, music schools, responsible ministry within a few weeks. In principle, it is culture, road construction, health resorts). The allocation even possible that in the same year, a municipality is awarded of special-purpose grants in most cases follows a formula. more than one grant by one of the ministries. The likelihood For example, schooling transfers depend on the number of that a grant is awarded is generally higher at the beginning enrolled students, while road construction transfers are a pos- rather than the end of a year when, as is usually the case, all itive function of the kilometers of roads that already exist resources are depleted. Yet if an application fulfills all the within a municipality’s boundaries. criteria but no resources are left over, the grant will simply Investment grants (Investitionszuweisungen) are tied not be awarded in the following year.28 only to a specific purpose but even to a particular invest- Mayors who seek to be reelected have several ways in ment project. The following types of projects are covered which they can increase the likelihood that their municipal- by this grant scheme: hospitals, municipal drinking water ity receives an investment grant. First, taking the trouble of systems, municipal (hazardous) waste disposal, public trans- preparing and submitting an application is a necessary con- port, municipal road construction, municipal child care dition for any grant receipt. Second, mayors should submit facilities, municipal elderly care facilities, habitat protec- the applications early rather than late in the year. Third, may- tion, municipal energy-saving measures, business-related ors should ensure the quality of the application (whether the municipal infrastructure, village and city renewal, water pro- application is complete and fulfills all funding guidelines). tection, libraries, museums, music schools, sports facilities, and municipal facilities for the disabled. In 2010, the Hessian IV. Empirical Strategy and Data state government allocated 388 million euros as investment grants. A. Empirical Strategy Investment grants also differ from general-purpose and I investigate whether elected mayors attract more invest- special-purpose grants in a second important aspect: they are ment grants from the state government than appointed allocated via an application procedure (Antrags- und Bewil- mayors do. As argued in section II, elected mayors may ligungsverfahren).26 The type of the project determines to attract more grants because their electoral incentives are which ministry the application has to be sent. For instance, larger or because they are more likely to have characteristics the Ministry of Social Affairs is responsible for projects that make them efficacious in writing grant applications. regarding elderly care and hospitals, while the Ministry of My estimations are based on a difference-in-differences Economic Affairs, Traffic, and Land Renewal is responsible (DiD) approach. The reform divides the sample into pre- for projects that concern public transport or village renewal. and posttreatment periods, as well as treatment and control The procedure for the allocation of investment grants is groups. The identifying assumption for any DiD design is as follows. First, in the second half of the preceding year, that the outcome in the treatment and control group would the state government disseminates a call for proposals for follow the same trend in the absence of treatment. This each type of project via the state government gazette (Staat- assumption is usually verified by comparing the pretreatment sanzeiger) and the responsible state ministries. Each call for trends of the treatment and control groups. proposals provides information on the goals of the grant pro- Municipalities that introduced mayor elections in 1994 gram, details on which kinds of projects can be financed, and or later serve as the control group for the municipalities a list of required documents to support the application.27 The that were treated in 1993. The control group for the other call for proposals closes with an application form that has to annual cohorts is determined analogously. The identifying be completed and to which the supporting documents have assumption for my empirical design is therefore that all six to be attached. This includes extensive documentation that cohorts have parallel pretreatment trends in the outcome the project complies with a long list of funding guidelines. variable (log of investment transfers per capita), which is Mayors are responsible for the preparation and submission confirmed by figure 1. As argued before, the timing of the of the grant application packages. The responsible ministry municipality-specific switch to mayor elections is due to decides whether a project grant is approved based on whether exogenous historical factors that are orthogonal to invest- the project fulfills the catalog of funding guidelines and ment grant receipts. This natural randomization makes it whether all other important information has been provided. even more likely that the six cohorts are similar and provides Generally, as long as the funding guidelines are fulfilled a reasonable approximation for counterfactual posttreatment and there are enough resources available, municipalities are trends in the absence of treatment. The exogeneity in the 26 These grants cover a large share but not the full cost of a project. The timing of treatment is further examined in section IVC. share of the project covered by the grant depends on the type of project and I implement the DiD approach using the dummy variable the type of costs. ElectedMayor that is 1 for a municipality as of the year 27 To give an example, in December 2012, a call for proposals published in the Staatsanzeiger concerned projects on energy-efficient refurbishments of municipal buildings (Hessisches Ministerium für Umwelt, Energie, Land- 28 If a large multiyear project such as the construction of a hospital is wirtschaft und Verbraucherschutz, 2012). The application form was eight involved, the grant is paid in yearly installments conditional on the progress pages long, and at least seven supporting documents were required. of the project.

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Figure 1.—Parallel Pretreatment Trends in the Outcome Variable = β + δ across the Six Reform Cohorts yit ElectedMayorit Election/AppointmentYearit + φ × ElectedMayorit Election/AppointmentYearit 4.5 + Xγ + αi + μt + εit.(2)

4 All hypothesis tests use heteroskedasticity-robust stan- dard errors. Bertrand, Duflo, and Mullainathan (2004) show 3.5 that autocorrelation is a substantial concern for the DiD approach. Therefore, in all of my estimations, the standard errors are clustered at the level of the 421 municipalities. 3 Some estimations also include county-specific time trends to capture systematic variation over time in a more flexible 2.5 manner.30 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 While the above specifications allow me to test whether Year Average log of investment grants per capita in Euros policy choices of mayors depend on the selection rule, 1993 cohort 1994 cohort 1995 cohort 1996 cohort 1997 cohort 1998 cohort any differences may be due to either incentive or selection effects. To discriminate between these two channels, I adopt The 421 municipalities are divided into six cohorts according to the year in which a mayor was first elected in a municipality. Each line in the figure represents averages in the log of investment transfers per two strategies. First, I add mayor characteristics as covariates capita for one of the six cohorts. to equation (2) and estimate the following model:

yit = βElectedMayor + δElection/AppointmentYear when voters have elected their mayor for the first time. The it it + φElectedMayor × Election/AppointmentYear baseline model is it it + Xγ + Zω + αi + μt + εit, (3) y = βElectedMayor + α + μ + Xγ + ε , (1) it it i t it where Z is a vector of mayor characteristics such as age, gender, or educational background. Any effect of direct elec- where y is the log of investment transfers per capita in tions on policy choices due to a different selection of mayors euros.29 Subscript i refers to one of the 421 municipalities, should be accounted for by these additional covariates. The and subscript t refers to a year in the sample period from estimates for the cycle can then be interpreted as the residual α μ 1982 to 2010. i are municipality fixed effects, and t are effect of larger electoral incentives. time fixed effects. To obtain more precise estimates, I also As a second strategy, I restrict the sample used to esti- include a number of controls in some of the estimations. The mate equation (2) to the set of mayors who were in office vector X includes demographic variables (log of population under both the appointment and the election system. As the size, share of 0–14-year-olds, share of over-65-year-olds) as underlying characteristics of these mayors have remained well as fiscal variables (log of rule-based transfers per capita, constant, any change in investment grant receipts can be municipality-specific tax rate multipliers for the business tax plausibly ascribed to changes in electoral incentives. While rate and the tax rate for residential property). a caveat to this approach is that this subsample of may- While the specification in equation (1) implies that the ors is (self-)selected, these estimates can provide further effect is constant throughout a mayor’s term, it is plausible suggestive evidence on the relative importance of electoral that differences are particularly pronounced or significant incentives and selection.31 in the years in which a mayor was selected, that is, in an appointment or election year (see the discussion in section II). My preferred specification therefore addition- B. Data ally includes a dummy variable that is 1 in each year Official data. The source for official information on where a mayor was either appointed or elected (Elec- mayor elections and fiscal variables is the Statistical Office tion/AppointmentYear) and interact this dummy with the of Hesse. This includes a data set on mayor elections in all ElectedMayor dummy. The estimation equation looks as 421 municipalities since 1993. The data set provides infor- follows: mation on the names, gender, and party affiliations of all candidates; the number of valid votes per candidate; and the 29 There are 77 observations with transfers equal to 0. I follow the standard election date. The Statistical Office also provides data on the approach in the literature and use log(investment transfers per capita + 1) for all observations. There is generally no consensus on how to deal with this problem. I have investigated the robustness of my results by instead 30 In online appendix B, I present additional estimations with county- excluding the observations where investment grant receipts are equal to 0. specific time dummies. The results are similar. In these additional estimations (see table B.1 in online appendix B), the 31 Specifically, even if the sample is (self-)selected, any observed differ- coefficient of the interaction term is slightly larger. As a second alternative, ences in policy choices in this subset of mayors cannot be due to selection I have conducted estimations with a level-specification excluding outliers based on fundamental personal characteristics as gender, educational (available on request). The results are also qualitatively similar. background, or prior professional career.

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amount of investment grants per capita in euros that a munic- Table 1.—Number and Share of Appointed and Elected Mayors in Office, 1992–1998 ipality has received from the state government in a certain year. I use these data as the dependent variable in my estima- Mayors Selected by Mayors Selected by tions. Finally, I have obtained data from the Statistical Office Council Appointment Direct Election on a number of fiscal and demographic variables. Summary Year Number Share Number Share statistics are provided in table A.1 in online appendix A. 1992 421 100% 0 0% 1993 338 80.3% 83 19.7% 1994 253 60.1% 168 39.9% Hand-collected data. The data provided by the Statisti- 1995 175 41.6% 246 58.4% cal Office are not sufficient to conduct the empirical analysis 1996 90 21.4% 331 78.6% as described in section IVA. In particular, data on mayor 1997 46 10.9% 375 89.1% appointments (names, gender, party affiliations of mayors, 1998 0 0% 421 100% The table summarizes how many appointed and elected mayors were in office between 1992 and 1998 appointment dates) and mayor characteristics (dates of birth, (the period in which mayor elections were introduced). Increases in the number of mayors selected by education levels, and fields of occupation) are not avail- direct election indicate the number of municipalities that introduced mayor elections in a given year. able from an official source. I have hand-collected these two Figure 2.—Average Investment Transfer Receipts over Time: missing types of data from various Internet sources such Municipalities with Appointed or Elected Mayors as municipality websites, mayors’ personal websites, and e- mail communication with the mayors or their administrative assistants and employees of the municipal archives. The data 4 collection for this unique data set took place between Sep- tember 2013 and March 2014. The hand-collected data cover 81.3% of the sample (9,926 out of 12,209 municipality-year observations). 3.5 Table A.3 in online appendix A collects descriptive evi- dence on changes in mayor characteristics over time. The t-tests provide evidence that there are some significant dif- 3 ferences in mayor characteristics: elected mayors are more 1982 1986 1990 1994 1998 2002 2006 2010 likely to have a degree from a higher education institution, they have studied other subjects at the university, they have Year a different professional background, they are more likely to Municipalities with elected mayor Averages for log of investment grants per capita in Euros be independent candidates, they are more often women, and Municipalities with appointed mayor they are older.32 The dashed line plots the evolution of the average log of investment transfer receipts in municipalities where an appointed mayor is in office in a particular year. The solid line plots the evolution of average log of investment transfer receipts in municipalities where an elected mayor is in office in a particular year. C. Exogenous Timing of First Mayor Elections A closer look at the data suggests that the timing of the municipality-specific switch to mayor elections is indeed for all possible pairs among the six cohorts. Table A.2 in quasi-random. There are in particular three pieces of evi- online appendix A summarizes the results. While there are dence. First, table 1 describes the timing of the introduction more significant differences than would be expected by pure of mayor elections in the 421 municipalities between 1993 chance, a large majority of the pairwise comparisons are and 1998. The first mayor elections are distributed quite insignificant. Moreover, there is no systematic pattern in the evenly over these six years as the quasi-experimental nature few significant t-tests, suggesting, for example, that later of the reform would suggest. Second, figure A.1 in online cohorts are systematically more or less likely to exhibit appendix A illustrates that the six reform cohorts are not certain characteristics. geographically clustered.33 Third, if this is a true natural experiment, the six reform cohorts should not differ in terms V. Results of predetermined characteristics. I have collected data on ten variables that describe the fiscal stance, the demographic A. Graphical Evidence structure, public employment, and the size of municipal- Figure 2 plots averages over time for the log of investment ities. For each characteristic, I calculate averages for the grants per capita received by two types of municipalities: year 1992 and conduct two-group mean-comparison t-tests those that still retain an appointed mayor (dashed line) and those that have introduced mayor elections (solid line). The 32 I also find that direct elections have likely led to a different selection of mayors by studying incumbency effects. The incumbency advantage of dashed line covers the time period 1982 to 1997 and the mayors declines after the reform, which indicates that voters prefer differ- solid line covers the time period from 1993 to 2010. There ent types of candidates than party elites do. These results are available on is substantial variation over time in grant receipts. One rea- request. 33 This excludes imitation of neighboring municipalities that elected their son is, as pointed out in section IIIC, that the amount of mayor as one motive for self-selection into one of the six cohorts. resources available for the allocation of grants depends on

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Table 2.—Appointed versus Elected Mayors and Investment Table 3.—Appointed versus Elected Mayors and Electoral Cycles Grants from the State Tier in Investment Grants from the State Tier I II III I II III Elected mayor 0.039 0.040 0.038 Elected Mayor× 0.070∗∗ 0.073∗∗ 0.074∗∗ (0.046) (0.046) (0.046) Election/Appointment Year (0.035)(0.035)(0.035) Year fixed effects Yes Yes Yes Elected Mayor 0.017 0.019 0.016 Municipality fixed effects Yes Yes Yes (0.048)(0.048)(0.048) County-specific time trends No Yes Yes Election/Appointment Year −0.026 −0.029 −0.030 Control variables No No Yes (0.028)(0.028)(0.028) Observations 12,209 12,209 12,209 Year fixed effects Yes Yes Yes Municipalities 421 421 421 Municipality fixed effects Yes Yes Yes R2 0.122 0.139 0.143 County-specific time trends No Yes Yes The dependent variable is the log of investment transfers per capita. Standard errors in parentheses Control variables No No Yes are robust to heteroskedasticity and clustered at the municipality level. Control variables include share of Observations 12,209 12,209 12,209 population over 65 years, share of population below 15 years, log of population size, log of rule-based Municipalities 421 421 421 transfers per capita, and business and property tax rate multipliers. R2 0.123 0.139 0.144 The dependent variable is the log of investment transfers per capita. Standard errors in parentheses are robust to heteroskedasticity and clustered at the municipality level. Control variables include share of population over 65 years, share of population below 15 years, log of population size, log of rule-based the tax revenues that the state government collects in a partic- transfers per capita, and business and property tax rate multipliers. Significant at *10%, **5%, and ***1%. ular year, which in turn is highly dependent on the business cycle. Independent of trends in average investment grants, during but has not led to higher grant receipts in general. The 7% to the phase-in period, the solid line is always above the dashed 7.4% difference amounts to about 42,300 to 44,700 euros for line: municipalities with elected mayors receive on average an average Hessian municipality with about 10,000 inhab- more investment grants than municipalities with appointed itants.34 This absolute increase is not overwhelming, but it mayors do. Despite the fact that the composition of the two is sufficiently large to for voters notice. Various additional groups of municipalities changes over time as municipali- projects can be realized with such amounts.35 ties gradually elect a mayor for the first time, the distance between the two lines is fairly constant. This pattern addi- C. Electoral Incentives and Selection tionally confirms the quasi-random timing in the switch to mayor elections, as discussed in section IVC. The estimates reported in section VB suggest that while transfers do not differ significantly in nonelec- tion/appointment years, they differ significantly in elec- B. Baseline Results tion/appointment years. While these results are consistent with the political agency framework, it remains unclear Table 2 collects the results for DiD regressions that relate whether the cycle after the switch to direct elections emerges a dummy for the mayor selection scheme to investment because of incentive or selection effects. transfer receipts (see equation [1]). Model I includes only As discussed in section IVA, I pursue two strategies a dummy for the selection scheme. Model II adds county- to explore this question. First, I report in table 4 regres- specific time trends. Model III additionally includes control sions where I control for observable mayor characteristics as variables. The estimated coefficient for the Elected Mayor specified in equation (3). With this specification, I analyze dummy is insignificant in all three models: there are no whether the inclusion of mayor characteristics as covariates significant differences in grant receipts. affects the size of the coefficient for the interaction term One reason that the coefficient is not significant is possi- that captures differences in the electoral cycles. The data on bly that elected mayors attract higher transfers only when mayor characteristics cover 398 of the 421 Hessian munic- a mayor election is about to take place—in the election ipalities (i.e., the sample size is slightly smaller than in the year itself. To explore this possibility, I compare transfer baseline as it was not possible to collect data on mayor receipts in mayor election years with transfer receipts in characteristics for the full sample of mayors).36 mayor appointment years. Table 3 has the same structure as table 2. The only difference is that two additional vari- 34 Average investment transfers per capita during the sample period were ables are included: the Election/Appointment Year dummy 60.39 euros. Hence, a 7% to 7.4% increase in transfers equals an absolute and its interaction with the Elected Mayor dummy (see increase of 4.23 to 4.47 euros per capita. 35 Examples: refurbishment of public day care facilities in Gross- Equation [2]). Gerau (28,000 euros) and Biebertal (17,000 euros), city renewal mea- The estimated coefficient for the interaction term in all sures in Grossenlüder (19,000 euros). See http://www.ruesselsheimer three models is significant at the 5% level. Transfer receipts -echo.de/lokales/ruesselsheim/28-000-Euro-fuer-Kita;art57641,1544693, https://wirtschaft.hessen.de/presse/pressemitteilung/17000-euro-fuer-kita are on average 7% to 7.4% higher in mayor election years -bieber, and http://osthessen-news.de/n1121/kreis-fulda-336-000-euro-f-r compared to mayor appointment years. That is, I observe -k-nftige-stadterneuerung-an-vier-kommunen.html. a cycle only in the new regime. In view of my results in 36 A problem with the drop in sample size may be that this attrition is systematically related to the timing of the switch in a municipality. I have table 2, this implies that the switch from appointments to explored this issue and find that attrition is not concentrated in a particular elections has induced a shift in the timing of grant receipts cohort.

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Table 4.—Selection versus Electoral Incentives: Mayor Characteristics Included I II III IV V Elected Mayor×Election/Appointment Year 0.064 0.064 0.061 0.061 0.065 (0.041)(0.041)(0.041)(0.041)(0.041) Elected Mayor 0.007 0.005 0.005 0.006 0.009 (0.051)(0.051)(0.051)(0.051)(0.051) Election/Appointment Year −0.016 −0.017 −0.016 −0.016 −0.019 (0.036)(0.037)(0.037)(0.037)(0.037) Education dummies No Yes Yes Yes Yes Occupation dummies No No Yes Yes Yes Female dummy and age No No No Yes Yes Party affiliation dummy No No No No Yes Observations 9,926 9,926 9,926 9,926 9,926 Municipalities 398 398 398 398 398 R2 0.118 0.119 0.121 0.121 0.122 The dependent variable is the log of investment transfers per capita. Standard errors in parentheses are robust to heteroskedasticity and clustered at the municipality level. All estimations include year and municipality fixed effects, county-specific time trends, and control variables (share of population over 65 years, share of population below 15 years, log of population size, log of rule-based transfers per capita, and business and property tax rate multipliers). Table A.4 in online appendix A is a more extensive version of this table and reports coefficients and standard errors for each mayor characteristic.

Table 5.—Selection versus Electoral Incentives: Subset of Mayors standard errors. Yet the coefficients have about the same Both Appointed and Elected During Their Career magnitude as in the baseline estimations (7.3% instead of I II III 7.4% in model III). These results provide additional sugges- Elected Mayor×Election/Appointment Year 0.063 0.076 0.073 tive evidence that the cycle in investment grants observed in (0.068)(0.067)(0.067) the baseline regressions is more likely to be due to higher Elected Mayor 0.046 0.043 0.060 (0.098)(0.098)(0.094) electoral incentives of elected mayors rather than changes in Election/Appointment Year 0.022 0.018 0.016 their characteristics. (0.051)(0.050)(0.050) Year fixed effects Yes Yes Yes Municipality fixed effects Yes Yes Yes VI. Robustness and Validation County-specific time trends No Yes Yes Control variables No No Yes In the following, I explore the robustness of the base- Observations 2,537 2,537 2,537 line results and validate further that the cycle observed in Municipalities 124 124 124 R2 0.184 0.211 0.221 the baseline regressions is primarily due to larger electoral 37 The dependent variable is the log of investment transfers per capita. Standard errors in parentheses incentives. are robust to heteroskedasticity and clustered at the municipality level. Control variables include share of population over 65 years, share of population below 15 years, log of population size, log of rule-based transfers per capita, and business and property tax rate multipliers. A. Timing of the Election As discussed in section IIIC, mayors typically submit the I first rerun the baseline regression without any covariates application and, if successful, receive the investment grant but with the smaller sample as a benchmark. The results are in the same year. Yet if an election is held early in the year, collected in model I of table 4. The estimate in this model mayors likely have smaller incentives to submit an applica- is 6.4%, slightly smaller than the baseline estimate of 7.0% tion as a grant may not be approved in time to help them to 7.4%, and insignificant. Models II to V successively add win the election. The estimates in table 3 are thus possibly the education level, the professional background, the gender a lower bound: investment grant receipts in an election year and age, and the party affiliation of mayors as covariates. may be higher when the election is held later in the year. The coefficients remain at the same order of magnitude Models I to III in table 6 explore this issue. I redefine as in model I. While the drop in the number of obser- the election dummy (and consequently also the interaction vations is problematic insofar as the coefficient becomes with the dummy for direct elections) such that it is 0 if the insignificant ( p-value = 0.12), the results in table 4 overall election is held in January or February (model I), between provide suggestive evidence that the cycle in grant receipts January and April (model II), and between January and June for elected mayors is due to electoral incentives rather than (model III). Thus, I define only years where the election was selection. held relatively late as election years (and treat election years The second strategy to discriminate between selection and where the election was held early as nonelection years). incentive effects is to restrict the sample to mayors who The coefficient estimates in models I to III confirm that the were facing both an election and appointment while in office. baseline results are likely lower bounds. The estimates are This reduced sample covers 124 of 421 municipalities. By positive, statistically significant, and of a larger magnitude considering this subsample, I test whether the same person has responded differently to an imminent appointment or 37 I report four additional robustness tests (exclusion of nonpositive trans- fers, inclusion of lagged dependent variable, inclusion of county-specific election. The estimates reported in table 5 are not signifi- time fixed effects, and placebo tests with other fiscal outcomes) in online cant given the smaller sample and the consequently larger appendix B.

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Table 6.—Timing of Elections I II III IV Only late elections March–December May–December July–December Preelection year Elected Mayor×Election/Appointment Year − 1 0.029 (0.039) Elected Mayor×Election/Appointment Year 0.087∗∗ 0.093∗∗ 0.108∗∗ 0.079∗∗ (0.036)(0.040)(0.044)(0.037) Elected Mayor 0.008 −0.004 0.003 0.024 (0.048)(0.048)(0.050)(0.050) Election/Appointment Year − 1 −0.013 (0.032) Election/Appointment Year −0.033 −0.035 −0.040 −0.032 (0.028)(0.030)(0.031)(0.030) Year fixed effects Yes Yes Yes Yes Municipality fixed effects Yes Yes Yes Yes County-specific time trends Yes Yes Yes Yes Control variables Yes Yes Yes Yes Observations 12,209 12,209 12,209 12,209 Municipalities 421 421 421 421 R2 0.144 0.144 0.144 0.144 The dependent variable is the log of investment transfers per capita. Standard errors in parentheses are robust to heteroskedasticity and clustered at the municipality level. Control variables include share of population over 65 years, share of population below 15 years, log of population size, log of rule-based transfers per capita, and business and property tax rate multipliers. Significant at *10%, **5%, and ***1%.

than in the baseline regressions. Furthermore, the magnitude their competence to voters before the first direct elections. of the coefficients is consistently larger the later the consid- On the one hand, the last cohort of appointed mayors may ered elections are in the year. For elections held between July have expected to be ousted from office by voters no matter and December, I estimate an increase in grants of about 11%. what because voters prefer a different type of mayor (e.g., If an election is held early in the year, it is plausible that a more charismatic type). Anticipating that no amount of mayors are already trying to acquire additional grants in the investment grants would convince voters to retain them in preelection or appointment year. Not accounting for this may office, they may have ceased to exert any effort to attract also lead me to underestimate the importance of the cycle. grants. I would underestimate the effect of the switch to I hence investigate the timing of grant receipts further by direct elections on investment grant receipts if this type of exploring whether there are significant differences in elec- anticipation effect is not accounted for (as these mayors were toral cycles across the two regimes one year ahead of an still in office when the first direct elections took place). election or appointment. I define the dummy variable Elec- On the other hand, the last cohort of appointed mayors tion/appointment year −1 and interact it with the Elected may have believed that there was some chance that they Mayor dummy. would be elected even if voters in principle would prefer a Model IV of table 6 collects the estimation results. The different type of mayor than party officials would. In this estimates suggest that one year ahead of a mayor elec- case, the last cohort of appointed mayors may have exerted tion, there are no significant differences in grant receipts even more effort to attract additional grants before the first compared to one year ahead of a mayor appointment. This direct elections to overcome their perceived disadvantage generally suggests that elected mayors increase their efforts due to the change in the selection rule. in attracting grants as close as possible to the election day. I explore this theoretically ambiguous issue in table 7 by Successfully attracting investment grants in a preelection distinguishing between the first mayor elections after the year may in fact be of little use for a mayor even for elec- switch and all subsequent elections. I find that the increase in tions that are held early in the next year. Since the grants are investment transfers is larger in the first than in subsequent awarded on a first-come, first-serve basis, waiting until the election years (10.1% versus 6.5% in model III), suggest- last few months of a preelection year likely decreases the ing that anticipation effects may have especially (but not chances that the grant will be approved in time (see section exclusively) led the last cohort of appointed mayors to exert IIIC). On the other hand, successfully attracting grants too additional effort in the election year. These results further early in a preelection year may not make a difference in the underline that electoral incentives matter for mayors’ policy election if voters have a short memory. choices.

B. Anticipation Effects C. Divided Government One further consideration is that the last cohort of Another important extension to consider is the issue of appointed mayors may have had either particularly small divided government—the possibility that the council major- or particularly large incentives to perform well and to signal ity and the mayor belong to different ideological camps.

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Table 7.—Anticipation Effects: First versus Subsequent Elections camp consisting of all other parties.39 A municipality is con- I II III sidered to be subject to divided government if a left-wing ∗ ∗ ∗ mayor faces a council with no left-wing majority, a right- Elected Mayor×Election Yearfirst elections 0.097 0.099 0.101 (0.057)(0.057)(0.057) wing major faces a council with no right-wing majority, and Elected Mayor×Election/ 0.061 0.063∗ 0.065∗ an independent mayor faces a council with a nonindependent Appointment Yearsubsequent elections (0.038)(0.038)(0.038) Elected Mayor 0.003 0.005 0.003 majority. (0.059)(0.059)(0.059) As a next step, I investigate how the increased propen- Election/Appointment Year −0.025 −0.029 −0.029 sity for divided government matters for grant receipts. The (0.028)(0.028)(0.028) Year fixed effects Yes Yes Yes hypothesis is that the switch to mayor elections led to larger Municipality fixed effects Yes Yes Yes electoral cycles only in municipalities that were not sub- County-specific time trends No Yes Yes ject to divided government. I explore this hypothesis by Control variables No No Yes Observations 12,209 12,209 12,209 estimating the baseline model for subsamples restricted to Municipalities 421 421 421 municipality-year pairs with and without divided govern- R2 0.123 0.139 0.144 ments, respectively. In models I to III in table 8, I reestimate The dependent variable is the log of investment transfers per capita. Standard errors are robust to het- the baseline models for the nondivided government subsam- eroskedasticity and clustered at the municipality level (reported in parentheses). Control variables include share of population over 65 years, share of population below 15 years, log of population size, log of rule- ple. I find a significant 12% increase in investment grants in based transfers per capita, and business and property tax rate multipliers. Significant at *10%, **5%, and ***1%. election years, which is substantially larger than the 7% to 7.4% increase in the baseline regressions. In models IV to VI, I replicate the baseline regressions for the divided govern- Appointed mayors typically have by default the support of ment subsample and find that the switch to direct elections the council. While divided government was generally pos- did not lead to electoral cycles in this subset of municipali- sible even before the switch (because council elections took ties. Overall, these additional results show that the strength place every four years and mayors were appointed every of electoral incentives has a decisive influence on how the six years), any misalignment between the mayor’s politi- reform of the mayor selection rule affects investment grant cal camp and the council majority was temporary. After the receipts. introduction of mayor elections, divided government became both more likely and more persistent since the mayor could VII. Conclusion remain in office without the support of the council majority as long as she was reelected by the voters. A prominent theoretical literature on political agency sug- Existing evidence indicates that electoral accountabil- gests that the way in which public officials are selected ity is lower under divided government (Lowry, Alt, & matters for their policy choices. My study is the first to Ferree, 1998), presumably because voters find it difficult identify the causal effect of the selection method on may- to accurately attribute responsibility for policy choices to ors’ policy choices and to differentiate between incentive the various branches of the government. In line with this, it and selection effects. In particular, I use the unique setting is possible that elected mayors have electoral incentives to provided through a reform of mayor selection in a German attract higher transfers in election years only when there is no state to investigate whether policy choices differ when may- divided government. The reason is that elected mayors may ors are appointed by a local council or directly elected by anticipate that a substantial fraction of voters attributes any voters. failure to attract additional grants to the opposition council I find that elected mayors attract on average 7% to 7.4% majority and mayors may therefore exert less effort. Alterna- more investment grants from the state tier in election years. tively, elected mayors may be concerned that an opposition Robustness tests indicate that this estimate is likely a lower council majority will claim some of the credit for additional bound. For appointed mayors, there is no cycle. I pro- grants. vide suggestive evidence that this cycle emerges because Figure A.2 in online appendix A shows how the share of of stronger electoral incentives. municipalities with divided governments has evolved over In view of my results, should mayors be elected or the sample period. As expected, there has been a discontin- appointed? On the one hand, my results may imply that may- uous increase in the share of divided governments in 1993 ors should be elected. First, the finding that elected mayors from about 40% to more than 55%.38 In this figure, divided exert more effort than appointed mayors to attract invest- government is defined as a misalignment between the polit- ment transfers in election years suggests that there may be ical camp of the mayor and the political camp of the council some benefit for their municipalities. Second, the switch to majority. I consider three political camps: a left-wing camp consisting of the SPD, and Green Party, a right-wing camp 39 It is reasonable to focus on political blocs rather than parties. First, consisting of the CDU and the FDP, and an independent almost all left-wing mayors are from the SPD, while almost all right-wing mayors are from the CDU. Second, while there are no explicit coalitions at the local level, it is plausible that the parties within the ideological camps 38 Note that I do not know the party affiliation of all mayors, especially cooperate when necessary. Note also that the figures on the incidence of at the beginning of the sample period. I drop observations with missing divided government and the regression results are similar when I define information when constructing the figure. divided governments based on individual parties rather than party blocs.

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Table 8.—Nondivided versus Divided Government I II III IV V VI Nondivided Government Divided Government Elected Mayor×Election/Appointment Year 0.125∗∗ 0.122∗∗ 0.122∗∗ −0.067 −0.062 −0.063 (0.056)(0.055)(0.054)(0.065)(0.064)(0.063) Elected Mayor −0.038 −0.043 −0.070 0.038 0.048 0.055 (0.078)(0.080)(0.079)(0.065)(0.064)(0.065) Election/Appointment Year −0.030 −0.030 −0.027 0.077 0.073 0.073 (0.045)(0.043)(0.043)(0.061)(0.059)(0.059) Year fixed effects Yes Yes Yes Yes Yes Yes Municipality fixed effects Yes Yes Yes Yes Yes Yes County-specific time trends No Yes Yes No Yes Yes Control variables No No Yes No No Yes Observations 4,820 4,820 4,820 5,590 5,590 5,590 Municipalities 316 316 316 350 350 350 R2 0.112 0.132 0.145 0.098 0.110 0.114 The dependent variable is the log of investment transfers per capita. Standard errors in parentheses are robust to heteroskedasticity and clustered at the municipality level. Control variables include share of population over 65 years, share of population below 15 years, log of population size, log of rule-based transfers per capita, and business and property tax rate multipliers. Significant at *10%, **5%, and ***1%.

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