Electoral System, Fiscal Rule and Form of Government: Case Studies in Political Economics Christian Friedrich Pfeil Birthplace: Schlema September 2016 Doctoral Thesis submitted to the Faculty of Economics and Behavioural Sciences at the University of Freiburg (Germany) Erstgutachter: Prof. Dr. Lars P. Feld Zweitgutachter: Prof. Dr. Bernd Raffelh¨uschen Dekan: Prof. Dr. Alexander Renkl Datum des Promotionsbeschlusses: 4. Mai 2017 Acknowledgment Writing a doctoral thesis is impossible without support from friends and colleagues. First of all, my wife Sabine consented to move from East to Southwest Germany and, for a long time, endured the absent-mindedness of her husband. Thank you very much indeed. Likewise, I give thanks to our three children as I often was not sufficiently patient with them. Many thanks to Lars P. Feld for his willingness to supervise this thesis, for the great opportunity to get in touch with the research area `Political Economics' and for an atmo- sphere of academic freedom at his chair and institute. I wish to thank Bernd Raffelh¨uschen for his readiness to act as second assessor. Many thanks to Toke S. Aidt for his generous hospitality and hence the chance to visit the university of Cambridge (UK). Similarly, I give thanks to Ulrike und Lutz Pfaff who hosted me in 2008 and 2009. Many thanks to my classmate Benedikt Fritz for many insightful discussions and a lot of joint train rides. And I give thanks to Maximilian Grasl for sharing my interest in the unique government structure of Belgium. I wish to thank my colleagues at the University of Heidelberg, the University of Freiburg and the Walter Eucken Institute Thushyanthan Baskaran, Heiko Burret, Christian Con- rad, Annabelle Doerr, Ekkehard K¨ohler,Sarah Necker, Daniel Nientiedt, Christoph Sajons, Jan Schnellenbach, Johannes Voget and Julia Wolfinger for a considerable number of very interesting conversations. I wish to thank my relatives in Geyer, Halle, Leipzig, Lippstadt and Thum as well as my friends in Eppelheim and Heidelberg (at the United Methodist Church) who encouraged me in various ways. Eppelheim, June 2017 Christian F. Pfeil Contents List of Figures III List of Tables V 1 Prelude 1 1.1 Do Institutions Matter? . .1 1.2 Methodological Reflections . .3 1.2.1 The Rubin Causal Model . .4 1.2.2 The Matching Estimator . .6 1.2.3 The Synthetic Control Estimator . .8 1.2.4 The Difference-in-Difference Estimator . 13 1.2.5 Discussion . 14 2 Do Electoral System Changes Impact on Government Spending? 18 2.1 Introduction . 18 2.2 Data . 21 2.3 The Alteration from the SNTV Rule to the MMM Electoral System in Japan 25 2.3.1 Institutional Setting . 25 2.3.2 The Effect on Social Spending . 26 2.3.3 The Effect on Old-Age Spending . 27 2.4 The Alteration from Plurality Rule to the MMP Electoral System in New Zealand . 28 2.4.1 Institutional Setting . 28 2.4.2 The Effect on Overall Spending . 30 2.4.3 The Effect on Social Spending . 31 2.5 The Alteration from ListPR to the MMM Electoral System in Italy in 1994 32 2.5.1 Institutional Setting . 32 2.5.2 The Effect on Overall Spending . 33 2.5.3 The Effect on Social Spending . 34 2.6 The Alteration from the MMM Electoral System to ListPR in Italy in 2006 36 2.6.1 Institutional Setting . 36 2.6.2 The Effect on Overall Spending . 37 2.6.3 The Effect on Social Spending . 38 2.7 Conclusions . 38 I 2.8 Tables and Figures . 41 2.9 Appendix: Variables . 54 3 Does the Swiss Debt Brake Induce Sound Federal Finances? 56 3.1 Introduction . 56 3.2 The Design of the Swiss Balanced Budget Rule . 59 3.3 Data . 62 3.4 Empirical Analysis . 64 3.4.1 The Effect on the Budget Balance . 64 3.4.2 The Effect on the Government Debt Ratio . 67 3.4.3 On the Introduction of Fiscal Rules among the Comparison Units . 69 3.4.4 The Debt Brake in the Medium Run . 70 3.5 Conclusions . 71 3.6 Tables and Figures . 73 3.7 Appendix: Variables . 78 4 Do Federalism Reforms in Belgium Cause Economic Growth? 79 4.1 Introduction . 79 4.2 Federalism Reforms in Belgium . 84 4.2.1 The First State Reform (1970) . 84 4.2.2 The Second State Reform (1980) . 85 4.2.3 The Third State Reform (1988/89) . 86 4.2.4 The Fourth State Reform (1993) . 88 4.2.5 The Fifth State Reform (2001) . 89 4.2.6 The Sixth State Reform (2011-13) . 91 4.2.7 Hypotheses . 91 4.3 Data . 92 4.4 Empirical Analysis . 94 4.4.1 The Growth Effect of the 1989 Reform . 94 4.4.2 The Growth Effect of the 1993 Reform . 96 4.4.3 The Growth Effect of the 2001 Reform . 98 4.5 Conclusions . 100 4.6 Tables and Figures . 102 4.7 Appendix I: Variables . 110 4.8 Appendix II: Comparison Units . 111 Bibliography 112 II List of Figures 1.1 Stylised Representation of the Synthetic Control Method . .9 2.1 Social Expenditure in Japan . 41 2.2 Social Expenditure in Japan, Post-Pre-Ratios . 42 2.3 Share of Elderly People in Japan & OECD Countries . 42 2.4 Social Expenditure in Chile, Japan, Portugal & Pool Countries . 42 2.5 Old-Age Expenditure in Japan . 43 2.6 Old-Age Expenditure in Japan, Post-Pre-Ratios . 43 2.7 Old-Age Expenditure in Japan (w/o DEU), Post-Pre-Ratios . 44 2.8 Old-Age Expenditure in Japan (w/o CHL, DEU), Post-Pre-Ratios . 44 2.9 Total Outlays in Canada, Ireland, New Zealand, USA & Pool Countries . 44 2.10 Total Outlays in New Zealand . 45 2.11 Total Outlays in New Zealand, Post-Pre-Ratios . 45 2.12 Social Expenditure in New Zealand . 46 2.13 Social Expenditure in New Zealand, Post-Pre-Ratios . 47 2.14 Social Expenditure in New Zealand (w/o DNK, ESP, FIN, SWE), Post- Pre-Ratios . 47 2.15 Social Expenditure in New Zealand (w/o DNK, ESP, FIN, IRL, POL, SWE), Post-Pre-Ratios . 47 2.16 Total Outlays in Italy, 1994 . 48 2.17 Total Outlays in Italy, 1994, Post-Pre-Ratios . 48 2.18 Social Expenditure in Italy, 1994 . 49 2.19 Social Expenditure in Italy, 1994, Post-Pre-Ratios . 49 2.20 Social Expenditure in Italy, 1994 (w/o NLD), Post-Pre-Ratios . 50 2.21 Social Expenditure in Italy, 1994 (w/o NLD, NOR), Post-Pre-Ratios . 50 2.22 Central Government Expenditure in Italy, 2006 . 51 2.23 Central Government Expenditure in Italy, 2006, Post-Pre-Ratios . 51 2.24 Central Government Expenditure in Italy, 2006 (w/o SVK), Post-Pre-Ratios 51 2.25 Central Government Expenditure in Italy, 2006 (w/o BEL, SVK), Post- Pre-Ratios . 52 2.26 Social Expenditure in Italy, 2006 . 52 2.27 Social Expenditure in Italy, 2006, Post-Pre-Ratio . 53 3.1 Cyclically Adjusted Budget Balance . 73 III 3.2 Cyclically Adjusted Budget Balance, Post-Pre-Ratios . 74 3.3 Cyclically Adjusted Budget Balance (w/o CZE, DEU), Post-Pre-Ratios . 74 3.4 Cyclically Adjusted Budget Balance (w/o CZE, DEU, NZL), Post-Pre-Ratios 74 3.5 Cyclically Adjusted Budget Balance (w/o AUT, CZE, DEU, ITA, JPN, NZL, SWE), Post-Pre-Ratios . 75 3.6 Cyclically Adjusted Budget Balance (w/o AUT, CZE, DEU, FIN, ITA, JPN, NOR, NZL, SWE), Post-Pre-Ratios . 75 3.7 Federal Government Debt Ratio . 76 3.8 General Government Debt Ratio . 77 3.9 Cyclically Adjusted Budget Balance, extended post-period . 77 4.1 Real GDP Per Capita in Flanders, 1989 . 102 4.2 Real GDP Per Capita in Flanders, 1989, Gaps . 102 4.3 Real GDP Per Capita in Belgium, 1993 . 103 4.4 Real GDP Per Capita in Belgium, 1993, Gaps . 103 4.5 Real GDP Per Capita in Flanders, 1993 . 104 4.6 Real GDP Per Capita in Flanders, 1993, Gaps . 104 4.7 Real GDP Per Capita in Wallonia, 1993 . 105 4.8 Real GDP Per Capita in Wallonia, 1993, Gaps . 105 4.9 Real GDP Per Capita in Belgium, 2001 . 106 4.10 Real GDP Per Capita in Belgium, 2001, Gaps . 107 4.11 Real GDP Per Capita in Flanders, 2001 . 107 4.12 Real GDP Per Capita in Flanders, 2001, Gaps . 108 4.13 Real GDP Per Capita in Wallonia, 2001 . 108 4.14 Real GDP Per Capita in Wallonia, 2001, Gaps . 109 IV List of Tables 2.1 Social Expenditure in Japan, w-Weights . 41 2.2 Social Expenditure in Japan, Predictor Balance . 41 2.3 Old-Age Expenditure in Japan, w-Weights . 43 2.4 Old-Age Expenditure in Japan, Predictor Balance . 43 2.5 Total Outlays in New Zealand, w-Weights . 45 2.6 Total Outlays in New Zealand, Predictor Balance . 45 2.7 Social Expenditure in New Zealand, w-Weights . 46 2.8 Social Expenditure in New Zealand, Predictor Balance . 46 2.9 Total Outlays.