Institutions promoting budgetary disciplince: evidence from Swedish municipalities

In English Conflicts of interest between planning and implementing branches create enforcement problems in the implementation of public sector budgets. We model the budget process as a dynamic game, which highlights the interplay between the institutional structure and players’ preferences. Using this framework, we collect unique data on budget institutions and preferences over fiscal sustainability to examine empirically how institutions influence the financial outcomes of Swedish municipalities. The estimations underline the importance of the interaction between institutions and preferences, as budget institutions exert a significant influence only in municipalities that report differences in preferences between levels of hierarchy. Specifically, the combination of a centralized budget process and a surplus carry-over rule is positively correlated to the financial outcome in municipalities that report such a conflict of interest.