Fiscal Rules and the selection of politicians: theory and evidence from Italy

Gamalerio M. and Trombetta F., 2025 – American Economic Journal: Economic Policy

The role of fiscal rules in determining budgetary and public finance decisions, both at the local and at the national level, is well known in the literature. But might their influence extend to other aspects of political and administrative life as well?

In the article “Fiscal Rules and the Selection of Politicians: Theory and Evidence from Italy,” published in the American Economic Journal: Economic Policy, Matteo Gamalerio and Federico Trombetta begin with the hypothesis that budgetary constraints are not mere accounting guardrails, but instruments that also shape the composition of the local political class.

To test this hypothesis, the authors exploit the timing and modalities of the application of the Patto di Stabilità interno (or Domestic Stability Pact, DSP), introduced in Italy in 1999 to curb municipalities’ deficits and indebtedness. From 2001 to 2013, the Pact was applied differentially based on population size: municipalities with more than 5,000 inhabitants remained subject to stringent constraints, while smaller ones were exempt.

This “natural experiment” allows one to observe how spending discretion—i.e., the decision-making freedom of mayors and councillors—plays a role in the selection of candidates. Individuals holding a university degree bring with them technical expertise and analytical capacities that require sufficient room for manoeuvre to be effectively employed. If these margins are compressed by overly rigid constraints, the political office loses part of its appeal for those with higher education, prompting such profiles to avoid that type of career.

The analysis relies on a dataset covering all municipal elections between 1993 and 2012 for municipalities with up to 15,000 inhabitants. By combining demographic, socio-economic, and candidate data, the authors construct a comparison between two otherwise similar groups: municipalities just above and just below the 5,000-inhabitant threshold, observed before and after 2001 (the empirical approach is termed “difference-in-discontinuity”). The change introduced by the DSP—which after 2001 applies only to municipalities above the 5,000-inhabitant cutoff—thus provides a genuine natural experiment for evaluating not only its impact on budget balances, but also on the incentives to enter the political arena. The main dependent variable in the analysis is, in fact, the proportion of mayoral candidates (and of elected mayors) holding a university degree.

Before 2001, when municipalities just above and just below the 5,000-inhabitant threshold were treated symmetrically by the fiscal rules, those just above the threshold exhibited a higher proportion of graduate candidates, by virtue of the mayor’s higher salary. Moreover, the two groups followed a very similar trend. After 2001, the difference between municipalities just above and just below the 5,000-inhabitant cutoff disappears, indicating that the application of fiscal rules causes a drop of about ten percentage points in the share of candidates holding a degree, and a similar reduction in the probability of electing a graduate mayor —effectively nullifying the advantage conferred by the higher salary (see Figure 1). These results remain robust when varying the width of the population window considered, applying placebo tests at other demographic thresholds where the DSP does not change, and checking that there is no suspicious “jump” in the number of municipalities around the cutoff.

The intensity of the effect depends on the discretionary space available to politicians: in municipalities where, prior to 2001, a substantial share of the budget was already tied up in rigid expenditures that are hard to alter (personnel, debt service), the impact of the fiscal rules on the share of degree-holding candidates is negligible. Conversely, in less “rigid” municipalities—those with wider decision-making margins—the DSP leads to a marked reduction of candidates with higher educational qualifications. These findings bolster the notion that the key mechanism through which fiscal rules affect the composition of the pool of politicians is their influence on the degree of flexibility in the decision-making process. Where discretion is already constrained by the presence of rigid expenditures, fiscal rules have little sway over the “human capital” of the political class, whereas their influence is pronounced where their introduction meaningfully reduces discretion.

To assess whether the level of education produces an effect on administrative outcomes, the authors examine the performance of degree-holding mayors versus non-degree mayors in municipalities exempt from the DSP (using a regression discontinuity design). The results here are unequivocal: on average, a graduate mayor is associated with higher capital expenditure (approximately €150 more per capita), a significant increase in the probability of delivering services above the standard level, and no deterioration of the budget balance. In municipalities subject to the DSP, instead, these differences vanish. In other words, graduate mayors exert a positive managerial impact when they enjoy adequate decision-making autonomy.

To conclude, Gamalerio and Trombetta demonstrate that budgetary rules—although essential for financial sustainability—also affect the human capital of those who choose to engage in politics. Hence, there is an additional trade-off inherent in fiscal rules, supplementing the well-known trade-off between flexibility and commitment (or, more broadly, between rules and discretion): namely, the trade-off between accounting rigor and the attractiveness of political office. This demands careful calibration: if the goal is to foster administrations capable of innovating and responding effectively to local needs, it is crucial to balance spending constraints with mechanisms that preserve the appeal of political offices for highly qualified candidates.